On the show, David Remnick of the New Yorker pointed out that Paulson has not been indicted. And since then numerous people have argued that Paulson did nothing wrong – rather that the fault purely lies with Goldman for not disclosing fully to investors who had designed the CDO.

But this is to mistake the nature of the crime here – and also to misread the legal strategy of the SEC.

The obvious targets are Goldman’s top executives, whom we know were deeply engaged with the housing side of their business in early 2007 – because it was an important part of their book and they were well aware that the market was in general going bad.

Either Goldman’s executives were well aware of the “Fab” and its implications – in which case they face serious potential criminal and civil penalties – or they did not have effective control over transactions that posed significant operational and financial risk to their organization.

They will undoubtedly pursue the “we did not know” defense – which of course debunks entirely the position taken by Gerry Corrigan (of Goldman and formerly head of the NY Fed) when I pressed him before the Senate Banking Committee in February. Corrigan claimed that Goldman’s risk management system is the best in the business and simply superb; the former may be true, but the latter claim will be blown up by Lloyd Blankfein’s own lawyers – they must, in order to keep him out of jail. (Aside to Mr. Blankfein’s lawyers: the people you are up against have already read 13 Bankers and may put it to good use; you might want to get a copy.)

And don’t be misled by the purely civil nature of the charges so far – and the fact that the announced target is only one transaction. This is a good strategy to uncover more information – for broader charges on related dimensions – and it allows congressional enquiries to pile on more freely.

As for John Paulson, the issue will of course be the “paper trail” – including emails and phone conversations. A great deal of pressure will be brought to bear on the people who have worked with him, many of whom now faced permanently broken careers in any case.

Here’s the legal theory to keep in mind. Mr. Paulson only stood to gain on a massive scale (or at all) if the securities in question were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson) was not disclosed. In other words, the Paulson transactions at this stage of the game only made sense if they involved fraud. The principals involved (Paulson and top Goldman people) are all super smart, with unmatched practical experience in this area; they get this totally.

John Paulson was not the trigger man – it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson’s idea – if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?) – then we are looking at potential conspiracy to commit fraud. And if he had conversations of any kind and at any time during this period with top Goldman executives, this will become even more interesting – so of course all relevant phone records will now be subpoenaed.

Mr. Paulson should be banned from securities markets for life. If that is not possible under current rules and regulations, those should be changed so they can apply. If that change requires an Act of Congress, so be it.

308 responses to “John Paulson Needs A Good Lawyer”

“Mr. Paulson should be banned from securities markets for life. If that is not possible under current rules and regulations, those should be changed so they can apply. If that change requires an Act of Congress, so be it.”

And since then numerous people have argued that Paulson did nothing wrong…

Yes, like James two posts ago:

And once again, no doubt to the annoyance of many, I don’t blame Paulson. It’s Goldman that had the duty to its investors, not Paulson.

Well, yes, that is annoying.

I of course don’t care about the investors in particular, but the assault on the people in general.

This is the equivalent of saying that if your brother and his friend together loot your house and burn it down, that you should only blame your brother because only he owed it to you not to do that to you.

I’ll never understand the argument that unless a criminal has some special relationship with you then you shouldn’t blame him for his crimes.

Yes, Paulson didn’t have a prior “relationship” with we the people. He’s simply a pure aggressor who launched an unprovoked assault upon us. While he’s not as big a criminal as Goldman, he’s qualitatively the same enemy.

As for the technical legalities, since the law has been so rigged to legalize most finance crimes, I don’t know if Paulson’s fraud and racketeering are among the crimes legalized or not (just like I don’t know if that’s the case with Goldman itself), and I don’t really care anymore.

The fact that there’s any question at all again demonstrates how nothing can be done within the parameters of this system to redeem America and its laws. If we wait for the system to “reform” itself, for example by having faith in its SEC, we’ll wait forever, for nothing.

I would like to beleive that there is some coordiantion in the effort bring legislative action to address TBTF and the SEC’s effort to lay bear the culprits involved in the crisis ground-zero (both GS & J Paulson). But given the legislative and regulatory capture, and the relative cluelessness of the general public of how this is interconnected, I am pessimistic of the outcome. If they are able to significantly charge and bring down GS and JPaulson execs, AND use the “spotlight of truth” to get republicans (and I am one) onto the right side of legislative action, then America may have a chance of avoiding this same kind of mistake agian. If either the SEC ends up taking the easy way out (read – the right people get bought off) or the legislative process produces a meaniless reform bill (read – pissed/bought off republicans can’t come to their senses), then the “doom loop will continue. Both efforts need to be successful. Can someone tell me how I might be wrong??

He doesn’t need a good lawyer, he needs to be held accountable (in the court of law).

“Either Goldman’s executives were well aware of the “Fab” and its implications – in which case they face serious potential criminal and civil penalties….” – criminal and civil penalties may be what ultimately brings down (or at least, sizes down) Goldman Sachs; their “house of cards” may fall after all.

And furthermore, Congress has been passing “Acts” with reckless abandon and the result is???? Have you ever asked yourself why most of the “Acts” are preceded by the word ‘Reform’? Take a look at the neumber of Tax Reform Acts. It is because: 1. they never get anything right in the first place; 2. they rewrite the laws to suit contributors and croneys.

How anyone who has ever really watched Congressional hearings could look to support from such “Kabuki” (Jake Chase)is beyond my comprehension.

I am still looking for an insurable interest. (legal-dictionary.thefreedictionary.com/insurable+interest).

How can a short seller claim he has an insurable interest in securities he never owned. Indeed, how can he claim that he had a right to sell what was not owned by him in the first place. Is he not the acting as the agent of the lender? He aledgedly borrowed the security but sold it without holding it himself at all. His obligation is to the person from whom he borrowed the security and therefore owes only what the two parties agreed upon in the first place, i.e., the return of the actual security plus interest.

Simon, I believe these trading systems are highly non-linear and probably chaotic. The risk equations used to model them can only have short-run effectiveness. In the long run such systems can transition to a completely different set of behaviors – such as when all the bets are called in.

Goldman’s risk management system is useless in this context. Such systems currently rely on probabilistic models, with confidence intervals wrapped around the presumed set of market behaviors. When the system transitions to another orbital trajectory in its so-called phase space, those models are completely useless.

What is needed are not risk models, but an actual system for tracking what portion of which debt obligation is going into which tranch for eventual incorporation into some instrument. In other words a relational database to track everything. I’ve written about this and it’s online (http://blogs.reuters.com/felix-salmon/2009/11/23/the-role-of-the-database-in-the-financial-crisis/). I don’t think it’s just a coincidence that our trading systems and financial markets are showing ever greater signs of instability in the age of computers and the Internet.

As for Goldman, I believe they were part of a larger, probably conscious, effort on the part of the people playing in this casino to rig the system for their benefit no matter what happened. Doing it this way, by letting an outfit with such a large stake in the failure of the CDO, structure it to their – and Goldman’s benefit = goes way over the line. It’s hard to see how their clients can continue to have much confidence in them at this point. It will probably take a while for that to return.

“The SEC isn’t alleging that Paulson did anything wrong or that Goldman was wrong in working with Paulson. The alleged fraud happened, the agency says, because Goldman never told its CDO investors of Paulson’s role in creating the security. Also, the SEC alleges, Goldman misled ACA about Paulson being short on the deal…Also, the fact that Paulson had created a hedge fund bearish on subprime mortgages was a fact in the news at the time. So the firm’s view arguably could have been known to ACA.

Other firms have done similar deals with hedge funds. What remains to be seen is whether the SEC will be able to make the kind of disclosure arguments it’s raised in this case in other cases, or bring charges against others under different theories. Mr. Khuzami says the SEC will look very closely. at “similar deals” by other Wall Street firms that sold CDOs, backed by souring mortgages, leading up to the financial crisis.”

I just assumed that Paulson would not be charged because he had probably agreed to roll on the GS execs. Why wouldn’t he? Big assumption on my part, but the real target of the SEC must be GS and its execs. Who knows? This is going to be very interesting.

And I was wondering if this might be a reason for GS to be broken up into smaller entities.

Although I am skeptically happy to see the SEC act here, why haven’t the mortgage companies been brought to justice for selling unmitigated junk? Why haven’t the rating agencies rules been changed for their insane conflict of interest? There have been so many different players that have destroyed the economy and feel that the cards will forever be stacked against those that have no power; everyday corporate-less people.

The greatest travesty of justice is that when these monsters will be brought before the courts they will be able to manipulate the truth with their massive amount of money. Against this the State has only to offer the truth. The question will be: Is this enough? Goldman has never been found guilty before, which does not proof their innocence but only demonstrates the truly unlimited way to manipulate the truth. Their scandalous wealth as we now know is based on massive fraud which make Bernie Madof look like a amateur. How could civilized society let those monsters in our midst let walk free? Society should shun those perpetrators of crimes against the People for the rest of their lives.

Bills of attainder relate to criminal charges and threats of jail. Being banned from an industry doesn’t fall under the rhetoric of “bill of attainder”. Simple notion, clear cut distinctions. Eat some crow, Raven … sorry, couldn’t help that pun ;-)

I quote from the fraud action against Goldman Sachs… “for making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation … ABACUS 2007¬AC1…tied to the performance of subprime residential mortgage-backed securities… was structured and marketed by GS&Co in early 2007 when the United States housing market and related securities were beginning to show signs of distress.”

“when the United States housing market and related securities were beginning to show signs of distress”?

Absolutely, at the date when ABACUS 2007AC1 was issued, April 26, 2007, I had already made four posts related to the subprime mortgage crisis… http://bit.ly/cwbLT2

And so: Where had the minimum caveat emptor we should expect from regulators gone? Where were the regulators? This has all the sign of being more complicated than it is been made out to be… Was it not all criminal negligence all over the place?

Net Gold Commercial Positions Surge To Multi-Month High Short Exposure

“Gold traders who observed this spike in commercial shorts, especially when combined with the surprising strong gold price action over the past two weeks, are concerned that the news about Goldman, and its ramifications on Paulson’s holdings of GLD, may have leaked over the past 10 days to allow banks to front-run today’s hit in the price of Gold.”

These people should all be sued and thrown in jail. Meanwhile, it is high time the govt does something for the true aggrieved party in all of this….the homeowner. I support a mandated reduction in the principal balances of all mortgages written in the 2000 to 2006 time frame. A write down of 50% should be a minimum tho I would like to see a 100% write-down since AIG default insurance has been paid out to someone well in excess of this total amount. The investors can go after goldman sachs and the rest of them top recoup their losses. Lets finally end the recession, bottom housing, and stop the foreclosure crisis in its tracks. This will do it.

I love you guys. I read everything you write and generally agree, but I wonder if YOU MISSED THE BOAT HERE.

If we switched everything Mr. Paulson did from a “Short Side” to a “Long Side” transaction, how does it look. Should we hang Mr. Buffet because he bought something cheap and did not disclose to the seller that he was buying it cheap? Should we hang him because he only wanted to buy the stuff that was really cheap and had his broker arrange the deal so the expensive stuff was removed?

I think we should encourage people like Mr. Paulson. Shorts may help limit bubbles. Who cares if short raids drive a stock price to zero, that is an opportunity for the long buyer to buy cheap. It is an argument we should encourage.

The people that should NOT be protected are the buyer and their advisers of the CDO. These people are obviously stupid or criminal and should be publicly embarrassed or jailed.

Curiously, just before the lawsuit against GS was filed, GS released information that they lost 98% on one of their real estate funds ($1.89B –> $30M). Now, that shows much worse judgment, in my view, than brokering a deal to sophisticated investors in which one was an idiot.

As a retail investor,I have no trust left in WS… do these folks ralize they have had a hand in the death of America and the global economy… extreme thought… not when you are just working hard and trying to make a better life for your family… and the world in general… it may not be just about money in the long term, it is about right and wrong… fundamentally… crimes against humanity…

“So GS gets their comeuppance from the SEC. Nobody should cry for GS if they are fined for their lies and misrepresentations. But what about their counterparties? They lost $1 billion because GS did not tell them that Paulson felt bearish about their CDOs?

Excuse me, but these people were not some Norwegian fishermen. They were professional financiers who should have known how to analyze securities. So how exactly were they defrauded of their money? Because GS forgot to tell them that security prices can go in both directions? Give me a break.

There is a much simpler answer. They were deceived because they were only too happy to deceive themselves. Subprime CDOs looked to them like a good risk so they wanted to get the kind of advice from GS that would justify taking this risk. Sure enough, GS delivered exactly what the customers wanted.

Based on the SEC complaint, I’m inferring that ACA failed in its due diligence responsibilities when they felt Paulson’s role was unclear in the structuring of the CDO. Couple that with the term sheet omission of Paulson should have rung red flags at ACA. I strongly suspect there was an “gentlemanly” agreement between the GS senior management and Paulson; otherwise, GS wouldn’t have sought out ACA.

At the heights of the TARP implementation, there were accounts stating that significant amounts of funds were being paid out to foreign (German) institutions by GS. We now know what that was all about…

Clinton: I Was Wrong to Listen to Wrong Advice Against Regulating Derivatives*

April 17, 2010 7:20 PM – ABC News – excer[ts

“In my EXCLUSIVE “This Week” interview, I asked former President Bill Clinton if he thought he got bad advice on regulating complex financial instruments known as derivatives from his former Treasury Secretaries, Robert Rubin and Larry Summers. He acknowledged that he was wrong to take the advice of those advising him against regulating derivatives.

“On derivatives, yeah I think they were wrong and I think I was wrong to take [their advice] because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. The money they’re putting up guarantees them transparency,” Clinton told me.

“And the flaw in that argument,” Clinton added, “was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency.”

CLINTON: Well, I think on the derivatives – before the Glass-Steagall Act was repealed, it had been breached. There was already a total merger practically of commercial and investment banking, and really the main thing that the Glass-Steagall Act did was to give us some power to regulate it – the repeal…

I think what happened was the SEC and the whole regulatory apparatus after I left office was just let go…

…the most important flaw was even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect a 100 percent of the investments, and indeed a 100 percent of the citizens in countries, not investors, and I was wrong about that. I’ve said that all along.

Now, I think if I had tried to regulate them because the Republicans were the majority in the Congress, they would have stopped it. But I wish I should have been caught trying. I mean, that was a mistake I made.”

In the mid 1990s, the US Supreme Court held 5-4 that the 1934 Securities and Exchange Act and Rule 10b-5 (anti-fraud) did not extend to those who “aided and abetted” a securities fraud. This decision could be reversed by a one-line Congressional statute. Perhsps the Fiancial Reform bill now pending could include such a provision. Then it would be clear that the reach of that law could include Paulson & Co.
Ed

First, I hold no brief for Goldman or Paulson. Each of them is chargeable with milking a corrupt and indefensible system and capitalizing upon the gullibility of market counterparties, something each of them probably does a dozen times a day and has been doing for years and years.

But what bothers me in all this is the idea that this Abacus CDO and its ilk were (or would have been, apart from Paulson’s covert interference) legitimate financial transactions which ought to have a place in our financial system. They are no such thing. This CDO was an insurance contract, a bet, placed by a party (Paulson) lacking any legitimate insurable interest. Right now there are several hundred trillion dollars of substantially similar outstanding bets infecting the electronic universe. Some of them are based upon Greek or Portugese or California bonds, others on the obligations of overextended debtors not yet household words.

There is absolutely no telling which banks, corporations, pension funds, hedge funds, university endowments, state and local governments have how much exposure to these toxic contracts, because all CDS liability is hidden off balance sheet. Any entity so exposed can blow up at a moment’s notice with no warning whatsoever. For those who think this an exaggeration, the mortgage crisis of 2008 involved actual mortgage defaults of roughly $300 billion. So far, the Treasury and the Fed have injected $23 trillion without even beginning to repair the damage.

In all the blather about the financial reform bill, there is nothing in it that changes the CDS game, which is the elephant in the room none care to recognize because they cannot imagine what to do about it. What must be done is to regulate CDS as insurance, to require parties buying protection to have an insurable interest. Moreover, we must tax all financial transactions as they occur, insist upon federal incorporation of public corporations and tax them on their total capitalization, regardless of where their accountants claim their ‘income’ is sourced. These are the only financial reforms that have a ghost of a chance of salvaging our economy from the jaws of the FIRE sector.

As for the culpability of Paulson (and Goldman) in the particular case at issue, I will tell you based upon long SEC experience that the case will not be litigated; it will be settled. To litigate it would take ten years and more manpower than the SEC could possibly summon if every single staff attorney did nothing else for a decade and beginning last Friday. Someone wrote elsewhere about the potential offered by document discovery for uncovering other crimes. Have you any idea how many millions of documents Goldman (and Paulson) can deliver at the touch of a few buttons? Good luck reading through all that drek. Not even Yves Smith could do it before Florida disappears under water.

Moreover, it remains unclear that even Goldman has violated 10b-5. Pawing through offering documents in search of missing facts is not properly the work of the SEC, but of starving private attorneys hoping for a payday, and Federal judges are not ordinarily receptive to the claim that an institutional investors has been victimized. IKB certainly should have conducted its own investigation of the CDO mortgage pool as part of its due dilligence, before signing on as an insurer.

I wish somebody would ask the SEC to explain its position on the need for regulation of credit default swaps. My guess is the response would be something like, ‘say what?’ If Mary Cunningham is still in charge down there, someone should tell her to stop wasting time chasing headlines, two bit hoods and Goldman minions.

Well, Clinton had his mind on other things, or at least on one other thing. Perhaps Monica was a Trojan horse sent by ISDA? Anyhow, during the Clinton years, the CDS market was only about $20 trillion and it was limited to corporate loans.

Note,…Stop… regarding J.Paulsen and Goldman….
Doesn’t Goldman own Washington? … Don’t they effectively own Obama? Paulsen is the richest,most powerful hedge fund trader in the World Simon. You really think that a team of investigators who just hired an x Goldman employee to head them up is going to seriously threaten either of these criminal entities? The entire Treasury Department is laced with Goldman spies, xGoldman graduates and would be Goldman employees who are eyeing the revolving door.
3/4 of Congress owe their campaign budgets to the banksters. This is a political issue. Until that is addressed, forget about justice Simon and get real. They will appeal all the way to the Supremes and the Supremes are now officially a facist court in favor of full on corporatism. How do you imagine they will rule?

Whats necessary is a peoples’ movement to short the stock of Goldman-Sachs across the World and to buy gold and silver and move entirely out of fraudulent bankster notes. But an organized Ghandiesque movement to short GS strikes at the heart of this most successful criminal gang in History.

It’s implied that every transaction has a buyer and a seller. Bundling securities that are “doomed to fail” is the opinion of the seller. Paulson exploited the market’s imperfect knowledge in this transaction; he simply knew more about what he was shorting than the party buying did.

Goldman’s failure to disclose is the real crime here. If I try to sell a car made of duct tape, the transaction is perfectly legal until the buyer asks, “Does this car run correctly?” When Goldman said, “Yes, the car was inspected by an un-biased third party,” the law’s been broken.

There should have been no question in the minds of SEC investigators that Paulson should have been involved in this suit as well. From the twenty eight year old trader the great “Fab” to the top of the Goldman feeding chain as well as the ratings agencies, all should have been brought into this action and one can only hope that before the dust settles they will. As long as there was money to be made, all parties looked the other way.

If ratings agencies are paid by their clients the banks for their services, how was it possible that Mr. Paulson could hand pick what he knew would fail and yet the ratings agencies allowed this garbage to be passed off with AAA ratings? A silly question I know, but it only further shines a light into areas that have thus far never seen the light of day in years.

The same holds true with all of the major banks who own stakes in the Depository Trust which clears all accounts and Goldman is at the top of the list when it comes to short selling stocks. In short, you have the fox’s guarding the hen house and to hell with Mr. and Mrs. public investor. JP Morgan is another firm involved in naked short selling especially in the silver markets. This bombshell become public knowledge at the March 25th CFTC hearings on the same subject.

If the Goldman fiasco was in fact a political move in order to push financial reform forward, no doubt many have their wish. The question now is whether those who write the laws from both parties along with the DOJ do the right thing. Create a fully transparent financial system and a level playing field for all investors. Secondly, put in prison those who have broken the laws that now exist and send a very clear message to all involved that unlimited greed and avarice are no longer fundamental elements in our banking system. As a banker, if you choose to live by these two deadly sins, a prison cell awaits you.

For any banker at Goldman who may even think of using the ” we didn’t know defense”, you’ll have to do better. Just ask any eighteen year old who stands before a judge for some traffic violation when the judge says, ignorance of the law is no excuse. many here have been caught with their hands in the cookie jar and now it is time to pay the piper.

Absolutely! Something very wrong in the whole operation, and on which the SEC keeps mum is that the was based on credit ratings that were not true… and the value of the securities artificially supported by the absurd low minimum capital requirements for banks holding these and that were allowed by inept regulators.

In fact the ABACUS 2007-AC1flip book states “Although at the time of purchase, such Collateral will be highly rated, there is no assurance that such rating will not be reduced or withdrawn in the future, nor is a rating a guarantee of future performance.”

The truth is that had it not been because the investors believed that the credit ratings were correct, they would not have invested, no matter how much Goldman Sachs could have falsely argued with them.

But this is of course nothing some want to be know because that would take away all the fun of being able to go after such a juicy foe or such a convenient scapegoat.

I can’t tell if Simon knows something about the SEC’s strategy that we don’t (he seems to imply that he has talked to them, but that would be highly unusual). But the notion that this suit is merely a ploy get more information to build something bigger doesn’t make much sense. The SEC can, and does, get whatever it wants in terms of information just by issuing subpoenas.

Although Simon’s probably right that this makes it easier for Congress to pile on. And, of course, that the fact that they have filed this suit doesn’t mean they don’t have more investigations that are still ongoing.

This is exactly the point. You cannot perfect a short position without a long position. So, why did Paulson pay GS to structure and market this product? Just for the hell of it? To sell it as a product to short?

“…Justice Department officials, however, counter with other statistics, showing that their efforts have already yielded a significant return. Since October 1988, these figures show that the department obtained 182 indictments involving 237 savings and loans. The scorecard: 200 convictions and three acquittals.”

How many convictions do we have today? Paltry compared to 200 I’d say. Scapegoats are no longer available and the DOJ has now the uncomfortable duty of trying to a) prosecute b) still maintain the markets, an impossible feat.

Simon should be careful ascribing “what they believe” or “their philosophy” to the statements of people like Larry Summers or Robert Rubin. The fact is, you *never* know what they believe, only what they say. It is also possible these folks have an agenda that you can read in their deeds, whether or not they say so.

Th Connecticut Attorney General Blumenthal publicly said that “criminal charges have to be pursued against Goldman.” So Cuomo is likely to come in the picture
tomorrow and do his job: taking down this House of Cards, or House of Frauds, seems more accurate..

Pro-publica is also on the matter and their first article on the Magnetar trade was the result of a seven-month investigation, so expect some more ‘disclosures’

you made the statement “For those who think this an exaggeration, the mortgage crisis of 2008 involved actual mortgage defaults of roughly $300 billion. So far, the Treasury and the Fed have injected $23 trillion without even beginning to repair the damage.”

Please, for my informaion, can you explain how you developed this “$23 trillion” number?

You are wrong about your key assertion, that Paulson only stood to make a killing if they “were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson)” was not known.
The only requirement for him to make money was that his judgement was right and the ratings agencies were wrong. Paulson decided that the ratings agencies had given identical ratings to bonds of very different quality. He used only publicly available information in forming this judgement.
It may be that Goldman would not have been able to get buyers if it had told everyone that Paulson was short not long; but even that is not certain. The fact that IKB et al wanted to go long the market at all shows they had a completely different (and very stupid) view of what was going to happen.
None of this says that the SEC complaint is unfounded. That depends on detailed facts we still don’t know about exactly what was said in selling ABACUS. Although Paulson made suggestions and was happy with the end result, it remains a fact that ACA did actually sign off on the final list. The final decision was theirs.
The reason they have gone for a civil rather than a criminal suit is likely to be that the burden of proof is lower in civil cases. The SEC just has to show balance of probability, not beyond all reasonable doubt.
As seems to happen with all these Wall Street scandals, like Repo105, the first time you see them it’s a shock; then you find out everyone was doing it. As Pro-Publica points out, this was not unusual. So either all the other banks get sued or this looks like victimisation of Goldman. Which in the end would be sure to result in their winning in court.

The SEC already has authority under the ’33 Act, ’34 Act, The Investment Act of 1940 and other statutory authority to ban anyone convicted of securities fraud, or, allegedly, in the case of Mr Paulson (in my opinion), of conspiracy to commit securities fraud, for any period, including a lifetime ban from being an officer, director control person, buying, selling or engaging in securities transactions and a host of other penalties and none of these are bills of attainder or ex post facto laws.

These powers have existed for generations, the real culprit here is the Bush Administration. Everyone in the industry just knew that his SEC wasn’t going after anybody but OTC companies (its easier for the rich to get richer if the little guys are out of business). Hence the singular focus of FINRA, the DTC and the SEC on little companies since the new Rule 144 went into effect in 2008. Only now are the big boys starting to sweat and this is just the start.

The first civil conviction will lead to the first criminal convictions and the whole house of cards will fall, as it should.

If Goldman is unable to get clear of these charges, there will be no Goldman and Blankfein, Paulson, Tourre, Lewis, Dimon and a host of others can look forward doing the Lord’s work from Atwater.

LONDON (Dow Jones)–“U.K. Prime Minister Gordon Brown said Sunday he is pushing for a special Financial Services Authority investigation into the actions of Goldman Sachs Group Inc. (GS) over the alleged misleading of clients.

“There is a moral bankcruptcy reflected in what I am reading about and hearing about,” Brown told the BBC’s Andrew Marr show.

“I want a special investigation done into what has been happening at Goldman Sachs. I want a special investigation done into the entanglement of Goldman Sachs and the companies there with other banks and what happened.”

NEW YORK, NY. (WTAQ) – “Fraud charges alleged by the Securities and Exchange Commission last week against Goldman Sachs is being called suspicious by some on Wall Street. The New York Post reports Barclays banking analyst Roger Freeman blasted the SEC for a, “well-timed, and perhaps not coincidental, effort to sway some on the fence Republicans” to get tough on financial reform.

Freeman also contends Senate Finance Committee Chair Chris Dodd is hoping for a vote on the Senate bill April 26. “Given the short span of time between now and the end of the month, we are not surprised to see the stepped up support for the bill,” says Freeman.”

Anyone can buy a CDS on anything they can get someone else to sell them a CDS on. Clinton, led by Rubin and Summers, and pushed by Wendy and Phil Gramm, ensured that the market in derivatives was completely unregulated.

One certainly couldn’t prove it, but, to my mind, Clinton bought his “not guilty” on impeachment by agreeing to the Gramm-Leach-Bliley Act and the Commodities Futures Modernization Act. Gore sure as hell wouldn’t have signed them.

The CDS is not insurance under any statute in the United States . Even if it were, it would be a state statute. The CDS was very , very carefully written to not be insurance. On top of that Congress exempted derivatives from regulation. Without doing my own research on this point, I would expect that the Federal government is precluded from regulating the CDS as of today.

The CDS started out as a swap of assets to the party buying the swap against a loss of value. The cash option feature was added. The party collecting may elect to swap the entire position or just receive cash for the loss at his option.

There are no elements of insurance built into the concept on purpose. First, the seller of the “insurance” may be anyone not a licensed insurance company. Consequently, if the contract were ” insurance” no parties could offer the swap but an insurance company. Even AIG Financial Services was not an insurance company. Nor was AIG itself an insurance company but a holding company that owned insurance companies. Remember when AIG tried to swap out high grade reserves of it’s insurance companies for junk held by AIG and AIGFP? The insurance companies could not even be a party to a CDS . This was deliberate. Brilliantly deliberate. There is no federal jurisdiction to regulate by act of Congress. No insurance company , all state regulated, that could even participate so far as I can figure out.

John Paulson legally bought CDS coverage on assets he did not own.

A lot of commentary assumes that Step Doctrine available to the United States Treasury in matters involving Title 26 cases may be applied outside tax matters. Not true. Especially true when there is no federal prohibition of the CDS and indeed Congress has exempted even regulation of the product itself.

John Paulson apparently rarely bought a covered security in a CDS contract as part of the deal. He had limited funds to invest from his hedge funds and every dollar was needed to buy CDS contracts. That is , he needed money to pay the annual and up front fees. He paid a fee and not an insurance premium.

What is apparently not generally recognized is that Paulson bought the CDS from say GS who resold the contract to others. A constant Paulson worry was that he did not know who bought the other end of the contract. Who had to payoff ultimately was unknown. The consolation prize to Paulson was that even if the ultimate party at risk failed, the broker was still on the hook. GS would be on the hook two ways. First, it merely laid off it’s risk just as a bookie lays off to a ” layoff bookie”. The bookie still owes the payoff if the layoff bookie fails. Secondly, a failure to make good by a major broker would kill his business. As dead as Lehman. Still Paulson worried endlessly until one day he had a visit and presentation from a major broker. It was then that he realized that most of the contracts were held by the big banks directly.

Compare Paulson to Magnetar. If I understand the Magnetar media material, Magnetar bought the bad asset being covered. Held it mostly knowing it would be a total loss. They then separately bought huge CDS multiples of the face value of the asset they held. They never sold the bad asset they bought. Is this a correct understanding of the general Magnetar model?

I should add that if the CDS were insurance, the offering of the contract by the seller that is not a licensed insurance company would be illegal to start with. Consequently, the contract would be void and the seller would not be liable for the loss. Given the nature of the parties to a CDS, this would be the first required due diligence on the part of the buyer of the contract.

Good grief, the first duty of the buyer of the contract would be making sure the contract was not insurance or even susceptible to interpretation of being insurance.

Then , there is the matter of insurance premium taxes levied by the states. If the CDS were even a whiff of an insurance contract every state would be seeking regulation and collection of premium taxes. None have gone this route from what I have been able to find out. Zilch. Every state in the union must consider the CDS to not be insurance.

All fifty states and the Federal Government must have long concluded the CDS was not insurance. They recognized the facts of the contractual agreement between the parties.

I can’t understand how any package of subprime loans could have been rated investment grade and sold in early 2007 no matter how constructed or what representations were being made. I had the misfortune of holding shares of American Home Mortgage that spring, no subprime initiation, a little Alt-A, and it went belly up on the inability to obtain financing from anybody. This was at ground level of mortgage initiation. Listening to the Q1 conference call was like eavesdropping on management’s exisential horror. I also can’t understand why the rest of the house of cards took another year to start to fall. (I lost more money confidently shorting the markets that fall.)

What Jake is saying is what I have been saying all along, since 2008. Now Keith throw some suspicion on the 23 trillion dollar number. Let him be reminded that the TARP overseer, a US government official, brandished 24 trillion of POTENTIAL exposure.

Now, we don’t know how much was really spent, in the USA or in Europe, because the Fed and the Treasury give money to private banks below the table, and also take countless expensive measure to support them, from buying mortgages, to rigging interest rates, to god knows what.

The fact remains: ALL AND ANY FINANCIAL PRODUCT OUGHT TO BE PROVEN SAFE AND EFFECTIVE FOR THE WORLD ECONOMY. Only then could it be allowed, perhaps.

In particular, as Jake says, and I said in the past, if it is sold as insurance, it ought to be backed up by real funds.

The general point is that finance got divorced from economics, like the cancer from the body it is killing. Time to cut it out.

If they claim to have been in the dark then they need to return the billions they paid themselves. If you make that much money then you should know every detail backwards and forwards. The jig is up and if any administration can get justice it’s this one.

Just to be clear regarding Goldman’s potential liability, under section 17(a)(2) and (3) of the Securities act all that’s necessary is a material omission or mistatement. There needn’t be an intent to defraud like under section 10(b) of the Exchange Act and Rule 10b-5. Materiality/reliance are going to determine the outcome and/or the terms of the settlement.

I can’t see how in reality/practicality the SIVs/SPVs (e.g. ACA) are just accomodation/convenience parties and virtually extensions of the sponsors of the securities they issue. ACA can go on and on about reputational risk etc. and the selection process but ultimately they did what Paulson and GS wanted. They could care less about the buyer.

About a century ago Karl Fürstenberg, a famous German banker was asked by a visitor to the Berlin stock exchange: “Excuse me Sir where is the toilet here?”
His alleged answer
“Ham wa hier nich, hier bescheisst einer den anderen”

“I can’t understand how any package of subprime loans could have been rated investment grade and sold in early 2007 no matter how constructed or what representations were being made. ”

Judge to Rating Agencies: Free Speech not Freedom to Defraud

Sep.08, 2009

“On Sept. 2, US District Court Judge Shira Scheindlin ruled that a lawsuit filed by institutional investors alleging fraud by Moody’s (MCO), S&P, and Morgan Stanley (MS) may go forward, dismissing the rating agencies’ traditional First Amendment, freedom of speech defense. MCO and McGraw-Hill (MHP), which owns S&P, declined when the ruling hit the wires, on fears that without the free speech defense the agencies could be open to unlimited legal liability.”

“In the report, the SEC cites an exchange of internal communications between two analysts at the same rating agency. The analysts were concerned about whether they should be rating a particular deal. One analyst expressed concern that her firm’s model did not capture “half” of the deal’s risk, but that “it could be structured by cows and we would rate it.”

SEC Chairman Cox Admits Deregulation Caused Crisis
Bush Appointee Christopher Cox, Head of the SEC, who admitted the credit crisis was due to deregulation, burned the oil wells as the Republicans left the White House along with all of the various agency heads. http://tinyurl.com/nzz25g

Under Pressure, Bush Eased Lending Rules
WASHINGTON (AP) –The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.http://tinyurl.com/5casnp

BILL CLINTON: “Well, I think on the derivatives – before the Glass-Steagall Act was repealed, it had been breached. There was already a total merger practically of commercial and investment banking, and really the main thing that the Glass-Steagall Act did was to give us some power to regulate it …”

I heard Clinton yesterday in the excerpt cited above where he said he had thought wealthy investors would have the transparency they needed (something to that effect), and admits he was wrong.
I just want to state that not even counting the costs in foreclosures, jobs lost, bankruptcies, there has been loss of faith in fiduciary institutions, and it’s about time government did its job and exercised some “oversight” (a Republican term) or “regulation” (which seems the Democrat version of the same).
One example of a disillusioned me: About 1999 a young man working for a big name brokerage firm cold-called me about opening a retirement fund. I had $5,000 floating around, and I was worried about my extant retirement funds because it was pretty clear we were in a bubble. So I told the young man he could have it, and see if he could invest it somewhere that would hold its value through the coming crash. He invested that money in Worldcom, and I used the internet to track it, and indeed the crashing soon began, but Worldcom was declining as steeply as anything — or worse. My young advisor was very cocksure of himself; he went with his colleagues on skiing weeks in Canada and came back as if they’d won Olympic medals. I called him: “I think it’s time to sell Worldcom.” Nothing happened. My stock kept skidding. I called again. “Would you please sell Worldcom.” Nothing happened. Well, at th point the stock was about worthless, he finally sold it. Not because I asked him to, but months later. That $5,000 is now $1,400, and my original plan to add more money if it proved its steadiness remains. The brokerage firm was sold and sold and sold again, to my mind with the intent of protecting those young idiots like mine. Every few months I would get a form: “Do you want to maintain the same level of risk?” Yes.
It’s not just the deceptive offerings of “advisors.” It’s their inability to follow the lead of their clients when they actually figure out what needs to be done. Timing.
Big Guys would have lawyers to handle these things. Little guys like me, if a rep has enough of us, can produce enough emoluments to keep them at it, teaching us one by one that “fiduciary” means “trickster.”
The victim is the integrity of a system we depend on for everything involving money.

In 1980, the averge income of a CEO was 50 times the average wage of their employees. Today it is over 500 times as great. And individual traders have the ability to make as much as a CEO.If the American people through their elected representatives do not have a problem with the current reality, then the current rules will not change. Also with the current laws regarding no limit on coporate contributions, it will get worse. These derivitive instruments created such high leverage that many people did not understand the consequences. With the current filabuster rule and the fact that states such as California who have 12 percent of the population and only have two senators while 22 other states have 12% of the population have 44 senators, nothing will change. The best news is that Syracuse University doesn’t want a big contributor,Jamie Dimon, to address the commencement ceremonies despite his big contributions. The solution is in the hands of we the voters. This country has lost it’s moral compass. We don’t have a problem with killing innocent people in Iraq and Afganistan, while our own citizens can’t afford health care. Write your congressman and tell him how you feel. Goldman Sachs and John Paulson are not that important

This notion that we must reinvent all the safeguards put in place after the Great Depression is getting old. I’m all for retro-active criminalization if that is possible. These guys knew right from wrong.

I’m no lawyer and it’s obvious I don’t know the law. But I sure know common sense. These people need consequences and serious/severe ones. We are not paying nearly as heavily for all this as the rest of the world who bought these securities, mortgages, whatever. And the rest of the world is trying to get tough with these guys. Take their money and put them in jail!

Break up the banks! Too big to fail should dictate the actions: break them up. And do the same with all out monopolies such as cable companies. I still can’t get HD TV because even though I have an HD TV, I have to pay extra for the HD part from Comcast. Why?

I know – off topic. But as an American, I’m tired of the way I am treated by big business in this country. The rich get richer and the rest of us scramble for our next tax payment.

One huge benefit from the SEC move is that the path from gov’t bailout to true gov’t beneficiary is becoming glaringly obvious to every citizen.

So far the folks along the the path who’ve been id’d are:
Banks US Gov’t bails out Banks (specifically their investmnent banking arms, which I don’t think has fully sunk in with the general population, IB/Comm banking is still conflated in most minds), Banks include fgn banks (i.e Soc Gen).

Govt Bails out AIG
AIG bailouts bailout IBs
IBs bailout customers

Result govt bailed out IB customers.
And now we finally have confirmation that major beneficiaries of the CDS contracts that ‘must be honored’ or all hell will break loose are the Paulsons/Magnetars of the world.

This is revolting enough, but there’s at least one more shoe to drop

Wait till Paulson/Magnetars customers are id’d. What ‘sophisticated and wealthy’ (and politically connected)investors are included in that group that benefited on the backs of ‘unsophisticated and not rich (and increasingly unemployed) investors.

The Greewich police dept’s budget is in for a big spike.

To put the 1 Abacus deal in perspective, Paulsons firm made 1b on this 1 transaction. His firm made over 25+b (I haven’t seen a solid number). Magnetar made a similar amount.

So these two programs alone transferred 50b! You guys can quibble all you want about whether the SEC slaps wrists and folds. There aren’t going to be any wrists left to slap once people finally grasp the enormity of this fraud.

Taibbi said it best the other day. He passed on this story when he first heard about it 1 year ago. At the time even he couldn’t believe it was possible the story was true. Who’s flabbergasted now?

Joanne Good points. But we still need regs-rules to prevent abuse of power of last 29 years .These folks must go under oath so we see them for what they are – crooks in $ 3000 suits . There must be strong punishment / huge fines for these White collar criminals. Problem is Reagan 1981 Bush 2008 – toxic deregulation policy made fraud- dirty deals – predatory lending perfectly legal
Right wing judges are doing best they can to
undermine us even further.

This is nothing different than someone seeing Citi mispriced at $50 a share and deciding to short it. (Remember here as above there is no guarantee that one is right in their analysis, or that it won’t take a long time for you to be right. A lot of people lost a lot of money shorting CITI/BS/Lehman which were found eventually to have been mispriced).

The only difference is that Paulson could not short the mortgages directly (If he could have maybe the mortgage market would not have gone so nuts).

Also playing the market is all about finding what you think are mispriced securities (why would you ever buy something you think is correctly valued?). The trick is to find someone with the opposite opinion.

The only “crime” here was GS not disclosing that Paulson had a role in picking the package.

This is for all the commenters today. Man I thought I was the grumpy one. It’s Sunday folks. The SEC taking action is a good sign. Take an aspirin, listen to this song, enjoy Sunday. There’ll be time to get cranky on Monday–trust me.

Paulson never bought the security in question so far as I can tell from researching what is available. Paulson independently bought other contracts that paid him if the subject security defaulted. Again these were totally independent and involved multiple parties. He did not even have to buy all of these contracts from GS. Even here he never collected on the default. Again, as far as I can determine ,Paulson sold the contract for payment on default to others at very much higher prices.

Thank God that there were some investors like John Paulson who questioned the rating agenicies and the global love affair with the US/UK mortgage . Imagine how overpriced these securities would have been if there hadn’t been those sellers. And Paulson was not secretive about his investment thesis. They were very open with the entire street and anyone who would listen what they thought about the market. The fact that they gave Wall Street parameters around the custom “mortgage index funds” that they wanted to created to implement their investment thesis and they were right is not unethical in any way. The issue at question is what did Goldman disclose to those institutional investors who wanted to invest in mortgages as to what they were investing in .

I should add. Paulson necessarily bought all his CDS contracts after the subject security came into existence. Those that offered Paulson the contracts acted on knowledge of an already existing security. Those that sold protection to Paulson made the offer. If there is insider problems, the problem exists with the offeror and not buyer Paulson.

If the Obama administration with Geithner, given enough time to address the mountain of documentation and trails, points an accusatory finger in the direction of Goldman Sachs, that is interesting. It’s politically savvy, I’d say. But those of us who have noticed the way the banks and financial advisors manage to make doormats of their clients are probably thinking: “I hope this is the tip of the iceberg.” Is someone trying to offer up a sacrificial lamb to placate the voting public? I am waiting for the next shoe to fall. I am waiting for the entire shoe-store to crash down in a chain reaction. No, no, that mustn’t happen.
Someone had commented that there is fault to be distributed high and low, from the person who tells you, “Oh, we’ll put down you make $70,000 a year,” knowing full well that’s not so, all the way up to the top. The common American sees abusive, usurious “fine print” at every turn, and one scapegoat will not convince us Obama et al have righted the ship of state. Whether Paulson is the smart guy or the criminal in this case seems a tedious legal issue.
A lot of us could surely see the American economy is running into seediness if we have to find value by inflating home prices rather than seeking productive enterprises to support. My music for today is Gilbert & Sullivan, all about the last hurrahs of the British empire. Laugh, sing, sob.
I agree with the commenters who say that until the financial influence of Big Money in congressional campaigns is reduced, whatever happens in DC is highly suspect, and most likely a “dog and pony show,” to assuage the populace.

There’s no crime in shorting the market. The crime here is the “conflict of interest” by Goldman in peddling an instrument that they know is being shorted & not transparently disclosing it. This is clear fraud. Such situations are common practices in Wall Street & we’ve not seen the end of it. We, as investors, should be ultra wary of the snake oil peddled by Wall Street. Those who’re still defending Goldman & Wall Street are not holding the losing end of the stick, their opinions will be entirely different if they are.

Could it be that the SEC was compelled to do something not because of public outrage over what has been going on between the nexus of Wall Street and Washington, but because the SEC itself may be feeling considerable heat itself from past handy work?

This story broke back in January of this year at http://www.worldreports.org but also appeared in the New York Examiner recently. How many government bodies get hit with 3.8 trillion dollar law suits as co-conspirators?

CMKM GOES MAINSTREAM WORLDWIDE AND IN GERMANY
Tim Barello has reported to us from New York [9th April 2010]: ‘Following a tremendous impact from Monday’s RT broadcast (which was seen in over 100 nations, and has since been reproduced and viewed many times over online) and the accompanying Examiner.com article, we can now note that CMKM has gone mainstream in Germany, via ARD, a major German broadcaster.
Link: http://boerse.ard.de/content.jsp?key=dokument_426752

MAIN CMKM REPORTS PUBLISHED HERE: SEE ARCHIVE:

• 09 January 2010: Text of the CMKM/CMKX lawsuit against the S.E.C.
Case Number CV10-00031-JVS (MLGX): See also Report dated 7th January 2010

Lets suppose that Goldman Sachs is H & R Block(only as a analogy representing a tax accounting firm mind you)and that Mr.John Paulson is a regular business client having his quaterly,or annual tax prepartion done. Mr. Pauson hands over all physical data,and vital documents to the tax accounting firm H & R Block (Goldman Sachs)! He fails to tell them that there is a third party involved by leaving out the documents. Unfortunately for Mr. Paulson’s…his fraudulent negligence has caught the hawkish-eye of the IRS which (IRS is the Security Exchange Commission) recieves/ gets all data,and copies. Bingo,…Mr Paulson is audited by the IRS (SEC),and is found guilty of malfeasance via tax evasion. But,…the tax accountant H & R Block (Goldman Sachs) is not liable too the IRS (SEC)for the United States Tax Code explicitly states that the sole person/entity responsible for the return is the individual having their taxes done! Mr. John Paulson goes to prison,and H & R Block (Goldman Sachs) is still in business unless the IRS (SEC) offers a plea bargain to incriminate the tax preparer(GS) into complicity,and collusion (client returns are predictable revenue streams?). Then all bets are off…with the least that could happen is a tarnished stigmatized reputation,or the worst being prison time for accomplices. Thankyou,…”Keep up the Good Digging for America’s Sake” PS. I found your site friday watching Bill Moyers Journal (tis a shame that Now,Worldfocus,and Bill Moyers Journal are being dumped by PBS/via Shapiro – sad,very sad indeed)

Agreed, but you unconsciously omitted the CLINTON part of that timeline…..under which Rubin and Summers successfully lobbied for Glass Steagall to be repealed (1996-arguably THE most important aspect of the period. AND, during this time period they also successfully argued AGAINST derivatives regulation and won against Brooksley Born. These two VERY key elements of the current debacle can be traced directly back to the Clinton (DEMOCRAT) administration. And, you have omitted the other DEMOCRAT (Barack Obama) whose administration has been monumentally important and significant in the response to the crisis, for better or worse, from your timeline.

Who wrote the CDS? It seems to me that if anyone has a cause of action, it is the CDS writer. Certainly he wouldn’t have sold a CDS on a CDO he knew was designed to fail?. So he must have been defrauded. And if it was AIG, why isn’t AIG suing everyone in sight? Dumb question.

“We were authoritatively advised on Saturday 17th April 2010 that this SEC Complaint against Goldman Sachs & Co. and a named Goldman employee was specifically triggered as a DIRECT consequence of the Complaint against the Securities and Exchange Commission and individually and severally against current and former SEC officials filed by the lawyers for the CMKX victims, Hodges and Associates, of Pasadena, CA, in January [see our report dated 9th January 2010] claiming $3.87 trillion following the floating of 2.25 trillion of phantom shares”.

Service of that complaint was accepted by the SEC’s Office of General Counsel both on behalf of the SEC and of current officers, while former SEC officers accepted service and had to arrange their own legal representation.

“On Black Wednesday (September 16, 1992), Soros’s fund sold short more than $10 billion worth of pounds sterling [citation needed], profiting from the Bank of England’s reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.

Finally, the Bank of England withdrew the currency from the European Exchange Rate Mechanism, devaluing the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was dubbed “the man who broke the Bank of England.” In 1997, the UK Treasury estimated the cost of Black Wednesday at £3.4 billion.”

I respond to this situation with the experience that many will view as disabilities but engenders a tremendous concern that this situation as well as the others that will almost undoubtedly begin to emerge jeopardize the American capital markets that have been in many ways the true engine of American economic growth. First, I was an investment banker with both Drexel Burham and Bankers Trust when those firms became the target of federal investigations. Second, I did manage to pick up a few basic concepts on my journey through law school. With that in mind, I would find it inconceivable that senior Goldman executives and John Paulson are ultimately not targets of federal criminal or civil prosecution if the SEC allegations are true. First, even if Goldman executives did not know of Fab’s actions, I believe that this failure, almost by definition, would constitute a “failure to supervise.” On that point, it is worth noting that Drexel’s CEO, who I believe was a wholly honorable man, was banned by for life the SEC from holding a supervisory position in the securities industry for such a failure. Second, the facts that the SEC alleges constitute, in my view, a classic conspiracy. While Paulson may not have overtly made any misrepresentation, it seems clear on the facts alleged that Paulson and Goldman were acting in concert and thus the acts of one are attributable to the other. Most importantly, the collective actions of all these parties, if true, threaten to destroy the trust that is essential to the efficient working of our capital markets. If clients and counter-parties cannot trust Goldman,the self-proclaimed paragon of virtue (doing God’s work no less) then the notion that a firm’s word is its bond has truly become a relic of another era. If only to disprove this conclusion, the federal government needs to pursue this situation with absolute vigor and commitment.

Re: Raven (Post#1) Your absolutely correct. It happened in the late 80’s when Michael Milken, and Ivan Boesky were banned from wall street ater doing prison time with others during the infamous scandal “Junk Bond Debacle”. Research under “Den of Thieves” James Stewart author. Unfortunately Milken,and Boesky went their own ways as did their cohorts,and continued unabated by the toothless laws which they circumvented like the slithering reptiles they are…still secretly regarded admirably by their wall street cronies!!!

It is the Enforcement Division of the SEC (not the DOJ) that has filed the civil charges in the SDNY. The SEC does not have the legal authority to file criminal charges. Only the DOJ has the authority to do that.

In addition, there may not yet be sufficient evidence to file criminal charges. Criminal cases face a higher standard of proof. In the civil case, the SEC only has to prove that GS and its minion “more likely than not” violated the securities laws. In any criminal case, the DOJ will have to prove “beyond a reasonable doubt” that the securities laws were violated. If the SEC uncovers sufficient evidence in the discovery process in the civil suit, the DOJ may file criminal charges later.

The trouble is that, unfortunately, (i) the SEC may have a hard time proving its case and (ii) even if the SEC prevails, Treasury and others will argue that indicting GS (as opposed to its minions) is a source of systemic risk. Also keep in mind, Rahm Emmanuel is a GS alum.

“We were authoritatively advised on Saturday 17th April 2010 that this SEC Complaint against Goldman Sachs & Co. and a named Goldman employee was specifically triggered as a DIRECT consequence of the Complaint against the Securities and Exchange Commission and individually and severally against current and former SEC officials filed by the lawyers for the CMKX victims, Hodges and Associates, of Pasadena, CA, in January claiming $3.87 trillion following the floating of 2.25 trillion of phantom shares”.

“CMKX WENT THROUGH THE LARGEST NAKED SHORT IN THE HiSTORY OF THE U.S. Nearly 7 TRILLION Naked Short Shares were sold.”

Today Henry Blodget on his Business Insider makes the point that much of the Paulson hoopla is in hindsight. When this transaction was put together Paulson was a nobody looked on as a has been or never was. So, a never was suggests a deal and GS acts on it? On top of that,Paulson was thought to be off the wall crazy by the bulk of the street players. This becomes clear in Gregory Zuckerman’s book. The guy was a loser that GS wanted to milk for the fees. So does Paulson have a case against GS. It seems after the facts success or failure is desired to govern the definition of fraud on Paulson’s part.

Blodget is very interesting here because he is also barred from Wall Street for life. He has gone through the experience.

The operative term for the acts, actions, and now rebuttals to the SEC by GS is: duplicity. It is the icing on a layer cake of fraud, deception, arrogance and aloofness. Here is where all Americans should be able to agree. Whatever your political position or financial status, nobody likes to be cheated. Ask any cheater you know.

The first CDO’s were created by a small time Boston Banker named Lawrence Fink back in the early 80’s. It has evolved into a myriad (CDO’s,MBS’s,ABS’s and R&CMBS’s)of abstract vehicles,all predicated on risk through structured tranches. Mr Fink recently was offered the CEO job of Bank of America but declined. He Helped found Blackstone Group,and now runs the largest i-Share/ETF’s company in the known financial universe called BlackRock Inc.(a actively/passively managed hedge fund). Attn: BlackRock Inc. went from revenues of $1.15tn/FY08 to approx.$3.4tn FY09. Why does this matter? Just follow the money,…? Here’s a clue – when Barclays plc bought (Barclays Capital merged with Lehman (Best Half) Brothers NY Brokerage/Trading House,and are now called BarCap plc.) Lehman Brothers,and literally robbed the best goodies,the cream off the top so to say…from CEO Jamie Dimon’s JP Morgan Chase…Robert Diamond CEO of BarCaps plc was told by Lehman Brothers traders/brokers to watch out for the “Racers”, the so called Sub-Prime/Tier 3/Alt-A Loans that Morgan wanted to pass onto Barclays books but the quickly conducted bankruptcy courts prevented it from happening, and JP Morgan Chase had to swollow hard,…big time (approx $10bn plus)? Thanks …”Keep Digging for the Sake of America”

“The trouble is that, unfortunately, (i) the SEC may have a hard time proving its case and (ii) even if the SEC prevails, Treasury and others will argue that indicting GS (as opposed to its minions) is a source of systemic risk. Also keep in mind, Rahm Emmanuel is a GS alum.”

Goldman Sachs Will Be Sitting Pretty With Emanuel in the Obama White House

November 21, 2008 – Washington Examiner – excerpt

“Goldman Sachs always has clout in Washington, as evidenced by the firm’s alumni serving as Treasury secretaries under both Presidents Bush and Clinton. Today, in these tumultuous times of bailouts and meltdowns when the investment banking leviathan needs Washington more than ever before, Goldman can leverage its most valuable asset yet—incoming White House chief of staff Rahm Emanuel.

Goldman Sachs is the giant of Wall Street, and more than any other investment bank, Goldman is surviving the current financial storm. Traditionally a Democratic booster, and one of Barack Obama’s top sources of funds in this past election, Goldman has always had some particularly strong allies within government. Emanuel is one such ally.

An interesting early chapter in the Goldman-Emanuel relationship took place in the setting of Bill Clinton’s campaign for the White House in 1992. Clinton hired Emanuel as his chief fundraiser.”

At the same time, however, Emanuel was on the payroll of Goldman Sachs, receiving $3,000 per month from the firm to “introduce us to people,” in the words of one Goldman partner at the time. This is certainly a noteworthy relationship, but it’s one that has almost entirely escaped scrutiny. Corporations and partnerships are and were at the time prohibited by law from contributing to federal candidates out of the corporate coffers. So, while Rahm tapped Goldman employees personally for six figures in gifts to Clinton’s candidacy—more than any other firm—Goldman, as a company, was helping keep Clinton’s top fundraiser well-fed.

The most obvious answer, as mentioned in this column two weeks ago, is in Emanuel’s lead role in shepherding the “$700 billion” bailout—first proposed by former a Goldman CEO, Bush Treasury Secretary Henry Paulson—through the skeptical House.”

God’s work? Robin Hood? Redistribution bank-style? Bandit-style?
The link goes to Pirates of Penzance “I am a Pirate King,” a rousing rendition from Iowa, of G&S (the British comic operetta pair) if you click the first choice. Sorry, I’ll have to work on embedding.

Can you believe we bailed out these scumbags? I say we indict both Paulsons…John and Hank–John Paulson for some form of securities fraud and Hank Paulson for some sort of collusion or favoritism for bailing out his GS buddies while Treasury Secretary.

Can you imagine Hank Paulson, John Paulson and Lloyd Blankfart in a three-way perp walk…how sweet would that be!

BILL MOYERS: What are you signaling with that headline, “Geithner vs. the American Oligarchs”?

SIMON JOHNSON: I think I’m signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we’ve seen many times in other places.

But they’re places we don’t like to think of ourselves as being similar to. They’re emerging markets. It’s Russia or Indonesia or a Thailand type situation, or Korea. That’s not comfortable. America is different. America is special. America is rich. And, yet, we’ve somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs.

BILL MOYERS: Oligarchy is an un-American term, as you know. It means a government by a small number of people. We don’t like to think of ourselves that way.

SIMON JOHNSON: It’s a way of governing. As you said. It comes from, you know, a system they tried out in Greece and Athens from time to time. And it was actually an antithesis to democracy in that context.

But, exactly what you said, it’s a small group with a lot of power. A lot of wealth. They don’t necessarily – they’re not necessarily always the names, the household names that spring to mind, in this kind of context. But they are the people who could pull the strings. Who have the influence. Who call the shots….

BILL MOYERS: Are you saying that the banking industry trumps the president, the Congress and the American government when it comes to this issue so crucial to the survival of American democracy?

SIMON JOHNSON: I don’t know. I hope they don’t trump it. But the signs that I see this week, the body language, the words, the op-eds, the testimony, the way they’re treated by certain Congressional committees, it makes me feel very worried.

I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there’s a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can’t. You’re stuck.

BILL MOYERS: Are we chumps?

SIMON JOHNSON: We’ll find out. Yes, we may be. Okay. It depends on how we play this politically. It depends on what our political system does. It depends, I think, on the level of reaction. The financial system is playing us for chumps, okay?

The bankers think we’re chumps. We’ll find out. We have leadership that can handle this. We’ll find out what they do.”

You’re repeating the bottom line, Robert. Thanks. I would add that eliminating the Senate entirely and leaving legislation to the Peoples’ House would also help. The Senate is no longer a functional entity.

Does anyone have faith that if the Goldman case ever reaches the U.S. Supreme Court that Roberts, Alioto, Scalia, Thomas and Kennedy will repudiate their pro-Big Business philosophy and support the SEC action?

These words are wise but still only words. It is no longer helpful to “write our congressmen.” I’ve written several to mine to no avail. Some years ago (back in the 80s), PBS did a documentary entitled something like “Betrayal of Democracy” – something like that. I actually bought it. It spent the hour looking at how little influence we the people have anymore on government. Money was already king. And the facts about the ratio between workers and CEO pay has been in the news ever since Japan emerged as a world economic force – wasn’t that the eighties, too?

Nothing new. The only steady trend I’ve seen is the increase in the influence of money and a decrease in the influence of the citizenry. Ever since Reagan.

Re: @ Jake Chase Your not to far from the coffee machine,but make a hard-left turn towards the hot water vessel for a refreshing cup of British Tea ,and please use up the “HoneyPot”…. we here label “Mon’ica”? Cheers,…and spot on!!!

Mr. Paulson did no wrong here. He simply told Goldman that he wanted to buy CDS (insurance) on a bunch of loans he expected to go bad. It was Goldman that packaged these contracts in to the CDO and found a buyer for them. What Goldman did with the contracts was not his concern, it was their job to find a counter party. They failed to disclose the origins of the investment to the banks they sold the resulting security to, and were payed fees for structuring it.

I went back and re-read Zukerman’s book about Paulson. Great Book! When you realize that Charles Prince Of CityCorp walks away with $38.8 million in 2006 and resigns in 2008 with the bank losing $15 billion most of which would be CDOs. All bonuses above a reasonable amount should be deferred for five years, and then a claw-back provision should be established. In the alternative someone should provide an insurance policy from the company or government to protect injured parties. In any case people like Jamie Diamond are paid to know what was going on. When someone was paying these big bonuses to 30 year old traders someone in top management had to understand the situation.It is called excessive leveraging and gambling with money that did not belong to them

Mr. Johnson is absolutely correct. The banksters are playing us for chumps because they control the currency, credit, and therefore, the country.

Banksters know that as long as the People don’t understand what keeps the banksters in control, the people will be perpetual sources of profit come hell or high water.

The Goldman fraud is but the tip of the iceberg. Goldman can collapse and another will take its place as long as there is no public sovereignty over our currency.

As long as banksters can perpetuate the lie that interest must be earned on “fiat money” loaned to the government they will have an infinite stream of profits. It will make no matter what Congress does to regulate commercial financial transactions as long as Congress is not empowered as required by the Constitution, to control and issue the currency of the government.

Goldman’s complicity in the recent collapse and governement rescue is but another chapter in the long history of government bailouts beginning in the early part of the last century. We can only speculate as to what would have happened if the government was the central bank and not the privately owned Federal Reserve System.

It is not a stretch to argue that the government would not charge itself interest in funding its budget. Nor is it a stretch to assume that since “fiat money” is legal tender there would be no need for income taxation since there would be no interest debt to finance.

This scenario would be the banksters worst nightmare. Moreover, there would be every liklihood that there would be no cyclical liquidity problems since the government would control a huge portion of the supply of currency and credit through its budget.

It’s so Constitutional yet so foreign to generations of Americans drinking the banksters koolaid.

The solution to all the angst demonstrated today is in the US citizen’s power . Between now and super Tuesday , June 8, 2010, twenty states will hold their primary election for House seats and Senate seats up for election. Go and vote against the incumbent ,if of your party or an open primary.

It is possible to turn out the entire house and one third of the Senate. Achieve even a 25 % incumbent toss out ,a revolution will have been put in play.

All the money paid in by big finance to incumbents will be wasted money. Those incumbents still standing for the general election in November will get the message about doing in the TBTF’s with a vengeance.

If this does not happen, the issue is in reality a political nothing. It will be shown the majority likes things just the way they are by not caring or being ignorant. From my perspective, this coming primary is the ultimate test of the issue. A little we ago, I ran across my copy of Kevin Phillips ” Arrogant Capital” dating to 1994. Phillips uses the same language and phrases that Simon and James do now along with a host of other economic and political guru’s as well. That was 16 years ago. A full human breeding cycle. There was a graph in Arrogant Capital showing citizen government satisfaction was only 19 % in 1994 versus close to 80 % in 1960. Same old stuff, same old stuff.

Are American’s just narcissistic whiners? Or is it different this time? Just vote against the current incumbent. Just vote in the primary.

This issue is hardly new. Bankster overlordship became critical about the time Reagan came on the scene.

Sadly I believe members of both parties have been infected with the greed disease that has swept over Wall Street. Both parties have been in positions of power over the years and the scary part is that regardless of part allegiance, those who control the seats of power seem only interested in keeping the game going while the American tax payer can be counted on to pick up the bill as the lender of last resort.

What’s that opening line in the Declaration Of Independence that goes something like….When in the course of human events…Bottoe line, if the people believe that their government is no longer working for all the people, the people have to right to dump it and start over again. Many believe we’re getting very close to that moment in time.

Our world known as America took a radical turn for the worse on a cold December night in 1913 when the Federal Reserve as well as the IRS were created. We no longer were the Constitutional US. We became the Corporate US and allowed a private banking cartel to control us the nation.

“We shall have world government whether or not we like it. The only question is whether world government will be achieved by conquest or consent.”
— James Paul Warburg – In an address to the U.S. Senate, July 17th, 1950

Warburg was the son of Paul Moritz Warburg, architect and first chairman of the Federal Reserve System and Chairman of the Council on Foreign Relations, 1921-1932.

Our world known as America took a radical turn for the worse on a cold December night in 1913 when the Federal Reserve as well as the IRS were created. We no longer were the Constitutional US. We became the Corporate US and allowed a private banking cartel to control us the nation.

“We shall have world government whether or not we like it. The only question is whether world government will be achieved by conquest or consent.”
– James Paul Warburg – In an address to the U.S. Senate, July 17th, 1950

Warburg was the son of Paul Moritz Warburg, architect and first chairman of the Federal Reserve System and Chairman of the Council on Foreign Relations, 1921-1932.

You’re kidding, right? Rule 10b-5 prohibits “to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading…”

Goldman Sachs stated that the securities were selected by an “objective third party”. “Objective” by definition means “disinterested”–but Paulson selected the worst possible targets, to short them.
That’s as misleading as it gets. They LIED.

Then, GS attempted to rebut the SEC charge by having Lucas van Prick state “Goldman Sachs never represented that Paulson took a long position in the securities”. No, that’s true. But making that statement involves a material omission of the fact that Paulson had taken a short position. And that omission certainly makes the statement misleading.

They should all be put in Jail, and throw away the keys…such distinguish gentlemen, deserve to be in the company of another distinguished gentleman, and colleague…Bernard Madoff…he could introduce them to Bubba.

The entire Banking Industry, and all of Wall Street, for that matter…should be Reformed. These disgusting, selfish human beings, only care about how much they can have…with total disregard to those, who invest their hard earned money…and to the nation. They have mislead and lied, and then, expect the people trust them…because, they have the interest of this nation at heart? Who are they kidding?
The problem, is…that they know, what they can get away with…and after, all this cools down…another Goldman Sachs, will come along…and, do this all over again. And again, the public will be outraged…and again, nothing is going to happen…as long as money, has it’s dirty hands in the Government, and on the Supreme Court.

It’s time for real change…reform the system, and put barriers, that will prevent all this horse manure, from happening again…placing tough laws, that will command automatic criminal procedures…without possibility of probation, or parole, if incarcerated.

If this situation is ignored…with your customary, procedural slap in the hands…sooner or later, it will happen again…but to an extent, that no one will recover back, and the true collapse of our nation will take place…for at least 50-75 years.

Did nobody consider that SEC’s looking the other way might be a policy that would not survive a change in administration? Are these “very intelligent” swindlers forget that there are thousands of legal sharks just waiting for a little blood in the water? One hopes that as soon as Goldman is nicked it becomes the prime, but not the sole, target.

How can Mr. Paulson be held responsible for seeing a major flaw in the housing situation and figuring out a way to profit from it? The government is the real criminal here. The SEC and FINRA are driving the little financial advisors nuts with their stupid regulations and yet they have completely overlooked, Barney Frank, Chris Dodd and Obama. All of them received huge campaign funds from Fannie Mae! Hell Franklin Raines, cooked the books and still got a $90,000,000 bonus!!! The liberals could care less about that! If you were buying up Toyota stock now because you thought they would eventually get their cars in good shape and do well, would you be a criminal for seeing a potential profit?

President Nixon back in the early 70’s annulled “Bretton Woods” putting the United States,and the industrial countries of the free world on notice that the Fiat System was now officially the worlds monetary system! Treasury Secretary Connelly (Gov of Tx/Kennedy assasination) was asked by a European delegation of the ramification,and the hubris Connelly replied tersely, “It’s your problem now”! Thanks

IKB, a commercial bank headquartered in Germany did not use $150 million to lend to small and medium sized German companies, as they historically had done, but instead invested and lost “$50 million in Class A-1 notes at face value” and “$100 million in Class A-2 Notes at face value” in ABACUS 2007-AC1, exclusively because of the following two reasons:

First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.

Second, in order to invest $150 million in these securities which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.

And this has absolutely nothing to do with the Goldman Sachs, the Tourres, the Paulsons or the ACAs of this world.

And so while naturally we should lend all our support to efforts to eliminate wrong-doings like those described in the SEC action against Goldman that should not signify we take our eyes of the unfortunate truth of having been saddled with grossly inept regulations, creating grossly bad regulations.

You want real reform you will have to wait till November. The facts are unpleasant but here goes. The Democrats have done nothing but elect tax cheats and lay down with the dogs like Franklin Raines a strong supporter of Obama. Follow the money and the corruption. Look at Acorn an Obama pet project and the unions another obama pet project. Let them attack capitalism at its core and guess what? Your playing into their hands! They want you to hate the banker and everyone but them. But, here is the real truth. The housing crisis at Fannie Mae would have been avoided if they had listened to “W” when in 2003 he went to congress and said something is fishy at Fannie Mae! Barney Franks is on record as saying it is fine! All Mr. Paulson did was watch the idiots in government make stupid decisions and he knew they were headed for trouble. Then he found a company that might insure his speculation. Remember, he didn’t know for a fact anything would happen! He just took a very educated guess that the Government would screw things up and guess what? They did!!! Had they listened to W they would have thrown all the bums out and fixed Fannie Mae which would have averted the crisis. But NOOO!! Chris Dodd and Hillary and Obama needed all the campaign money they were giving to them!! So they were all hands off!! You now have the result and you want to blame capitalism!! You should be wanting to impeach all these crooks in government!!@!

Hope so, he definitely called it. He knew the government would screw things up, they always do. He was betting the farm and everything he had on the incompetence of the government! You should too!! Name a program they have gotten right!

No! He is absolutely free to exploit an opportunity but, in order to aspire being part of a government, instead of “betting the farm and everything he had on the incompetence of the government”, he should have been out there doing his utmost to explain what was happening… instead of figuring out which of all the CDS were the worst.

He might be a savvy investor… good for him… but that does not make a good citizen out of Paulson.

I’m sorry that this comment is not placed after an appropriate article, but I was struck by Rubin’s comments as played on Charlie Rose’s program today. relative to hi s role as Chairman. Perhaps something was lost in the editing, but I didn’t hear him speak to his responsibility to the shareholders of Citi. They lost a significant amount of money.

The primary responsibility of the board of directors is to protect the shareholders’ assets and ensure they receive a decent return on their investment.

and:

In General Electric’s 2002 annual report, the issue of director independence was addressed: “At the core of corporate governance, of course, is the role of the board in overseeing how management serves the long-term interests of share owners and other stakeholders. An active, informed, independent and involved board is essential for ensuring GE’s integrity, transparency and long-term strength. As a result of the 2002 changes, 11 of GE’s 17 directors are ‘independent’ under a strict definition, with a goal of two-thirds.”

Yet another of his failures, but we overlook the key item (sarcasm) he was well paid

Come to think about it. Reading in the SEC action (53) IKB… late 2006, was no longer comfortable investing in the liabilities of CDOs that did not utilize a collateral manager, meaning an independent third-party with knowledge of the U.S. housing market and expertise in analyzing RMBS” sound like exactly that type of b.s. excuse being construed by anyone trying to hide their own responsibility in the affair.

Did IKB really believe what is said on ABACUS 2007-AC1 flip book on page 34 about ACA Capitals ABS Credit Selection including “On-site Visit”? What a laugh! Checking up the individual mortgages on site?

> Here’s the legal theory to keep in mind.
> Mr. Paulson only stood to gain on a massive scale
> (or at all) if the securities in question were
> mispriced

That is always true in all markets (whether they be financial or otherwise). If someone pays you exactly what something is worth, things get pretty boring quickly.

> , i.e., because their true nature (that they had
> been picked by Mr. Paulson) was not disclosed.

That is a giant and preposterous leap. Securities are often mis-priced by individuals as well as markets for reasons unrelated to disclosure. In this case, the primary change in views on valuation between Paulson (either smart or lucky) and everyone on the other side of the trade including ACA was a different view of the sustainability of housing price appreciation.

The value of the underlying securities in the synthetic CDO did not change because of the person or persons who selected them… They changed based on how innacurate your model of default rates in the particular mortgage pools were.

> In other words, the Paulson transactions at this
> stage of the game only made sense if they involved
> fraud.

Just because you can write it (or say it on TV) does not make it so. Logically, one does not follow from the other.

Had Paulson lost his entire bet (as other fund managers earlier in 2005 and 2006 making similar bets did) because the housing market continued to inflate, would you accuse ACA of fraud???

This is pure drivel.

Paulson should not be vilified for doing better research and shorting assets that he though were overpriced, when buyers on the other side with different research were buying assets they thought were under-priced. That is how markets work (when they are working) to establish a price equilibrium…

We all would have been better off had there been more Paulsons out there to counter-balance the euphoric bubble blowing crowd earlier in the cycle.

To accuse someone of fraud for making a good trade is utterly preposterous. This position should really be re-thought, and retracted.

Following your logic (which I find utterly illogical), you are basically saying *everyone* who has ever made a successful trade is guilty of fraud, provided that they didn’t tell the contra-side party their identity.

Since every equity market trade is essentially anonymous, your “logic” would say that any equity profitable equity trade made is an act of fraud.

The most charitable I can be is to say that this is just wrong and poorly thought out.

“”They (GoldenSacks exex) will undoubtedly pursue the “we did not know” defense.””

Not, if they’re as smart as they are purported to be. The congressional hearings with Ms. Brooksley Born, head of the Futures Commission, who sounded the alarm repeatedly 11 years ago, had created a huge buzz on the Hill and Wall Street and prompted an organized counter-attack that eventually led to her dismissal.

A modern day Pecora commission with Ms. Born, who is exceptionally well-versed in the history and depth of the crime, is the only appropriate way to handle this. Greenspan, Rubin, Summers, Blandfiend, Dimon, Paulson (John and Hank) and many others, should be put under immediate house arrest, their assets frozen, their passports revoked, and put on a Most Wanted List to stop them from escaping justice on non-US passports.

My point is that in the next six weeks time a methodology exists for spontaneous change in the legislature. If the voting citizenry is truly angered and they do not vote out the incumbents they are just whiners or so stupid as to not see their opportunity. The angered citizen does not even care enough to expend the energy to think enough to vote out the deceitful incumbent, if the incumbent be that. The incumbent might be more confused than even the voting citizen. It is easy to see why the newly elected legislator would conclude they are helpless too. Only a vast change in incumbency might chasnge this and only of a minor nature at that.

Might we really be witnessing that our society is no longer able to address the ever greater added weights of complexity? This time though, in varying weights and circumstances every industrial society is suffering the same inability to cope with increased complexity?

The natural solution to overbreeding is developing from over complexity?

I would think that both Simon and James think of themselves as globalists?? Certainly, the other major economic guru’s seem to be globalists too. Even Jeff Rubin who wrote “Why Your World Is About To Get a Whole Lot Smaller” seems to be a globalist.

I wonder if the people of the world simply cannot cope with the complexity and thus we will see collapse of society back to simpler forms until stability is reached. Species over reach.

I think you need to put down the pitchfork and take a deep breath. You have morphed somewhere in the last few weeks from a thoughtful observer of the economic context to a hysterical agitator for financial witch trials.

So there are only two possibilities, that either Lloyd Blankfein and David Viniar knew the all the particulars of this deal and what was represented to ACA and the other parties involved or they are guilty of negligence in running the firm? Really, those are the only two possibilities? They track every deal of this kind at the executive level in a firm of 33K employees? Time for a reality check Simon. Could you make that claim about Fab’s boss or maybe his boss’s boss – sure you could. But about all the senior execs at Goldman – doesn’t pass the laugh test.

Likewise, let’s consider this whopper:

“Mr. Paulson only stood to gain on a massive scale (or at all) if the securities in question were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson) was not disclosed. In other words, the Paulson transactions at this stage of the game only made sense if they involved fraud.”

Please explain why the Paulson transactions “only made sense if they involved fraud”? As it turned out, you could have throw darts at any mezzanine subprme RMBS (or CDO based thereon) of the 06 or 05 vintage and made a killing by owning the CDS on those issues. Paulson’s influence in shaping the list of reference securities in the deal in question might have made them fail a little faster, but the end result would have been the same with virtually any basket of subprime mezz debt from this era. Paulson had a negative view on housing and shorted a class of securities (mezz subprime RMBS) that was most exposed to a housing price decline – fraud was not needed to make those investments pay off – just a decline in housing prices.

Next, let’s address this claim:

“The principals involved (Paulson and top Goldman people) are all super smart, with unmatched practical experience in this area; they get this totally”

Well, they probably are smart, but let’s recall that in April 07, John Paulson was not viewed as a hedge fund genius or a mortgage derivatives savant. He was a hedge fund manager with a respectable but not outstanding record, known as a risk arb guy – certainly not a “name” on Wall Street. And as far as every story I’ve read about him indicates, not known in any way for his involvement in the mortgage market prior to 2005. So as to his unmatched experience, that would appear to be all of two years in the mortgage market prior to the Abacus deal.

Second, let’s consider the state of the mortgage derivatives market in April 07. The ABX, which made liquid trading of mortgage derivatives feasible, didn’t exist until Jan 06. CDOs of RMBS had only been around for a few years. No one had a deep base of experience with these securities because they had only existed for a few years.

Finally, let’s think about who ACA was. For some reason, no one in the press has bothered to learn much about them. They can be thought of as a smaller version of AMBAC or MBIA. They provided insurance wraps on structured finance products as their main business, and had a side business as an investment manager of CDOs which was their role in the case in question. In other words, the core competence of the firm was evaluating credit risks in structured finance products. They were not some clueless school pension fund from Paducah – they were directly in the midst of the structured finance markets. As the manager, the CDO was effectively theirs and the fee structure gave them clear incentives to pick securities that would not default quickly. So do you think that it is reasonable to believe that ACA would just take Paulson’s implied imprimateur, as alleged represented by Goldman, on the bundle of securities reference by the CDO, or is it more reasonable for them to run these RMBS through their own internal models (which given the core competence of the firm were likely as least as sophisticated as those Paulson might have used) to come up with their own assessment of the risk involved? Hard to believe that in April 07, the word of John Paulson was all you needed to know to effectively go long a bunch of mortgage derivatives.

I think the more likely reality, is that ACA, like a lot of other “super smart” people on Wall Street, couldn’t imagine a collapse in housing prices was possible. Paulson had an independent view about the health of the housing market and indeed thought the risk of substantial price declines was indeed “mispriced”. (BTW, Simon, that’s what makes markets in securities when people have different views of their prospects and either buy or sell as a result.)

So to sum up, was Goldman guilty of fraud in not disclosing all the facts – sounds like they could be (let’s remember we haven’t seen all the facts in the case yet – anyone remember how the Duke “rape” case turned out when we heard all the facts). Did Paulson pursue a short on the housing market aggressively, yes – but so far as we can tell so far, he hasn’t broken any securities laws.

Simon, you need to do better than a call to round up all the people who aggressively pursued profit from the debacle in housing and ban them from the securities business. The participants involved were all adults, its just that some had done their homework on housing and some hadn’t. Last time I checked, that’s not a crime. Before you lose your credibility, put down the pitchfork and do some sober analysis of the facts involved and think about how some highly trained people on different sides of a trade might have come to very different conclusions about the prospects for the housing market.

Would that we could somehow force all the viewers of American Idol (Idle?) and CSI to watch Bill Moyers session with Simon Johnson and James Kwak.

Thanks goodness someone of weighty position is risking championing this reform cause and raising awareness. It just needs to reach a broader audience so as to spark protest and action with Congress from the grassroots level.

Only when accountability and consequences are enforced will the morally vacant of Wall Street even begin to think twice about behaving responsibly. We need to have more Jeff Skillings serving 23 year sentences in order to gain credibility with these people.

I applaud Simon and James’s effort, and ask what I might do to help spread their gospel. We need our own Tea Party that propagates fact and truth about financial reform. This is the window of opportunity for positive change. Let’s not let it close without meaningful results.

It is important to realize that incumbents have very little or no opposition,…chiefly because of political jerry-mandering,or what’s called re-districting where their seat is literally guaranteed for life! The primaries are useful in districts where a large number of independents are registered too oppose the incumbent,and get on the ballot. This only works for the US House,and not the Senate where re-districting doesn’t hold water. Republican,Democrat,or Independent is wide-open,and as you’ve suggested,throw all the bums out. Caveat emptor…be careful what you wish for? We could get someone far worse than what was disposed. PS. Be pragmatic, and not myopic, do your research – all the crass vipers are well aware of the exuberant zeitgeist neo-political nuance.

President G.W Bush publicly spoke to his sheepish flock mid 2002…that, America’s housing problem will fix itself – if those who do not believe in “Free Markets” don’t dare tamper with it! Amazing,…simply amazing,…

The gospel that the only guilty of this crisis is Wall Street and the bank oligarchs and that the regulating technocrats, probably pals of Simon, had nothing to do with it?

The gospel of Kwak on that the bankers had an incentive to underestimate risk because then they would have to come up with less capital… and completely ignoring the fact that it is the regulators who allow less capital based on the perceived risks?

Or the gospel of Simon preached on the Maher’s Real Time about VAT not being regressive in Europe?

I read every post; I agree with you 90%+ of the time. You are just wrong on Paulson. The CDO’s in question were bundled from EXISTING investment grade rated subprime RMBS!!

The mortgages in question had been originated on average 9 months in advance of him shorting them. How is he part of the problem?!?!

Paulson and his employees would tell anyone who would listen that a mez CDO was alchemy and utter crap. He told Barney Frank as did Kyle Bass and numerous other people who were short subprime in 2006!

The idea that the only people yelling STOP while Chuck Prince was saying that they were going to keep on dancing as long as the music is playing are responsible in any way for the problem is totally asinine.

Really, you have jumped the shark.

Blame Moody’s, blame Citi, Countrywide, blame Bush, and Congress, FNM, FRE, but to don’t blame the people who said it was all wrong and stupid BEFORE it blew up.

Really, if you have any response at all to the fact that the mortgages existed 9 months on average before they were shorted, please email me. Otherwise, you are insane.

You mean like when Bill Maher reaching down after what he believes are true societal values says “the IRS has become an organ of social engineering… why if you have a child you get a tax credit, why not a tax debit, I mean that kid is going to cost everybody a lot of money” and everyone laughs and applauds?

Shorting the market,and hedge-funds are healthy because they cull the system,and keep both sides honest. Unfortunately your thesis is flawed,for the channel stuffing would have gone on forever without someone’s conscious ratting out the ferrets of fraud. All are guilty – but all don’t want to be the next example that will be Hanged by their Entrails,Quartered,and deboned,…

I’m not jake but the $23-24 trillion number is the sum of TARP, Treasury guarantees of Fannie & Freddie and the Fed’s purchase of toxic assets. The first place I heard it was in reports by Dylan Ratigan of MSNBC.

IMO they’re all just a bunch of thievin’ lowlife corporate welfare bums taking their dinner on the dole.

Not one of them would know an honest dollar if they used it for their coke straw.

Absolutely! The time to scream bloody murder was when the original lousy mortgages were awarded and packaged and rated and, before that, when the regulators created the incentives for it… not when someone discovers it and try to makes a buck on it… even though it would have been more good citizen’s like to denounce it… but who would have believed him… before the music stopped?

No one in their right mind shorts a product,no matter what vehicle it be without thoroughly investigating it. But due diligence is not part of this guys make-up. These guys like it fast,hard and big,…it’s a high for them to beat up the little guy – strange psychosis personality disorder of dominance equates to their twisted success? Please be well advised if he had shorted when first sold, he’d be toast. A good theft has no origin, and certainly leaves no trails,period!

During the GWB-era, many policies that made me wonder at the shortsightedness of folks forgetting about change in administration; particularly unitary-executive stuff; warrant-less wiretapping, hiding documents behind security ratings, and the like. Seemed to me that the conservatives approving these things ought to have been concerned about a liberal having that kind of power in the oval office. But they assumed a liberal would (rightly) undo things.

That there would be such policies in finance also needing undoing isn’t surprising. And that the money men didn’t expect them to be undone isn’t surprising, either.

We measure other’s by our own yardstick. I don’t think folks expected the money train, unlike so many other nasties, would be undone. Why would you shut the spigot off, when it’s pouring gold out into your hands so nicely? Even if it is the greatest transfer of wealth upward in all of history?

18 April 2010
JP Morgan Responds to Calls for Goldman Investigation By Warning Germany on Banking Regulation, Asks for More Influence On European Politicians

‘”When profits fall too sharply then capital will move somewhere else, where there is more money to be earned, for example non-regulated markets,” Chief Executive Jamie Dimon said in the German mass circulation Sunday paper Welt am Sonntag. “The question is, is that what regulators want?”… he also said the banking industry could do with more influence on politicians.” Reuters

In response to calls for an investigation of Goldman Sachs and tighter regulations on the Wall Street Banks, the CEO of JP Morgan has delivered fresh promises of financial damage if the Banks are restrained in their derivatives dealings by government regulation, and even more arrogantly, demanded greater access to European politicians……Con’t

1) I’m not a lawyer, just someone who understands the investment business and that there are two sides to every trade and that some people do their homework better than others.

2) Real commercial life is often complex Bruce, and not just on Wall Street. We can have a reasoned debate about how much complexity we want in financial products, whether they need to traded on exchanges and so forth. A call for the banning or jailing of someone who played by the rules as they existed at the time the trade was made doesn’t advance a honest debate about how best to regulate Wall Street.

3) Has inciting a legal lynching based on specious logic (and no supporting facts) become appropriate behavior for a member of the MIT intelligensia???? I thought the place stood for more than that.

“Mr. Paulson did no wrong here..” What else does your crystal ball tell you? A guy like Paulson plays in that twilight zone between right and wrong, moral and immoral, legal and illegal. MY crystal ball tells me the guy is dirtier than a public high school urinal.

I think public hanging in Times Square for the likes of Madoff, Wall St, Banks (management) and govt officials that caused and or allowed the financial disaster.

SEC Chairman Cox Admits Deregulation Caused Crisis
Bush Appointee Christopher Cox, Head of the SEC, who admitted the credit crisis was due to deregulation, burned the oil wells as the Republicans left the White House along with all of the various agency heads. http://tinyurl.com/nzz25g

—-

Under Pressure, Bush Eased Lending Rules
WASHINGTON (AP) –The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.http://tinyurl.com/5casnp

—-

Wealth Gap Is Increasing, Study Shows
The rich really are getting richer and the poor are getting poorer, a new University of Michigan study shows. Rising inequality isn’t new. The gap between rich and poor started growing before Ronald Reagan took office.

But what happened under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth — and they know it. http://www.sciencedaily.com/releases/2007/08/070807171936.htm

John Paulson is the biggest terrorist of this century. he should be sent to Gitmo for life. he has committed acts of financial terrorism against our economy and against the millions of innocent american families.

To me the most disturbing part of these comments is the degree to which people who know a lot about what happened are pointing fingers in different directions, each claiming to have found THE cause of the problem.

Even a superficial look suggests that many things went wrong over a substantial time period. The failure was systemic. Concentrating attention on a part of a failing system may not prevent its ultimate failure.

Jared Diamond wrote a book (Collapse) studying human organizations that failed. In the cases he considered, a system started breaking in some way, but the people who depended on it failed to understand what was happening, or else just failed
to act. Our financial system diverged from the production segment of the economy a long time ago, and has managed to take on a level of complexity that
defeats our ability to understand it (otherwise why so many contradictory solutions being offered) and mocks our inability to act.

Diamond didn’t study cultures that survived a system meltdown, and surely sometimes events come along to fix things despite the impotence of the people involved. But expecting a rescue is a dangerous game to play.

I think the point that Simon and Kwak made on Bill Moyers is key. Break super-large entities into smaller parts. This is a system-wide act, which
has a potentially large number of beneficial consequences. We might then have the opportunity to
understand these entities, and perhaps manage them without destroying their usefulness. Do it now. We will never recover the billions in illicit gains made by the modern equivalents of loan sharks and con men, but at least we might force them into retirement.

Don’t be silly. He is most probably no saint, he most probably did not act the best in this whole affair BUT, he did not award the bad mortgages, he did not package the original CDOs, he did not rate any of the securities, and he did not provide the regulatory incentives that originated this crisis.

If Paulson handpicked the makeup of a CDO that he thought destined to fail, and hired GS to sell it to an investor, nobody in his right mind would purchase that thing knowing that (1)it wasn’t picked independently, and (2) GS was betting against it. The only way that an investor would purchase that CDO is if that [material] information was withheld from him. So, as per the answer to Q1, it was either fraudulently or negligently withheld, but I’m leaning more towards the former (as is Simon and the SEC).

Q3: Then you seem to imply that no one could possibly be experienced in this CDO market as it has only been around for a few years. Securitization of mortgages started back in the late 80’s, so it is entirely feasible that Paulson was “smart” in these matters. And he was in charge of a hedge fund with billions under management. He was no rookie. You also seem to imply that ACA could not conceivably have been pressured by GS or anybody else in the Abacus deal or any others. You seem like a smart guy, so I don’t even think I need to convince you that not only is it conceivable that GS pressured ACA and others into packaging CDOs of their own choosing, but is in fact a certainty.

“Simon, Simon; Stoneridge v.Scientifc Atlanta – Decided before the Supreme Court 2008. At issue was Section 10(b) of the Securities Exchange Act regarding liability of third parties for aiding and abetting (conspiracy to commit securities fraud). The “strict constructionist” Roberts Court was able in their decision, due to lack of specific language (in the law, as written by Congress) to let third party conspirators skate, as they did not directly provide fraudulent information to investors. In this case, only Goldman Sachs would be held liable for securities fraud.

At the time of the case, the SEC wanted to state that they felt that third party conspirators should be considered, and held liable, but were prevented from doing so by the Bush administration.

Sexy case, too, as it involves all three branches of our government. Also shows the necessity of Congress to be very specific in the language and intent of any financial reform. Silence = Loopholes, and this one was a whopper.

I have my own personal lawsuit against Wells Fargo Bank, Barclays Capital Real Estate dba HomeQ Servicing, Citigroup, Inc., ACC Capital Holdings dba Argent Mortgage and Ameriquest– and so far I am holding on despite the defendants’ co-ordinated attempt to kill my lawsuit. I could use some help, but i have a case precedent or two that’s stopping the bad guys. And they’re all bad.

IKB the German bank bought the two tranches of ABACUS 2007 almost exclusively because of the following two reasons:

First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.

Second, in order to invest $150 million in these securities, which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, when compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.

If IKB had known that Paulson had had his hand in the picking and known fully about his motives then they might have asked for a slightly higher interest rate and still bought them.

If the securities did not have the splendid credit ratings assigned to them by the credit rating agencies then they would probably not have bought them even if Mother Teresa had done the picking.

If the regulators had placed the same type of capital requirements on all assets then IKB would have stayed home, lending to their traditional clients, instead of going to California to dig prime rated subprime gold.

Think again, punishing and prosecuting retroactively happened and continues to happen. Under the Immigration reform act of I think 1992 Naturilzed Citizens than commited even misdemeanor crime that fell under the Drug War BEFORE they became citizen, ie before they turned 18 and could become citizens, and paid the price be it fines or a minimal jail time, were recharged and prosecuted as having commited a felony against the United States. 99% were found guilty and stripped of Citizenship or their Green Card and deported. Happened to me. Caught with 2 ounces of pot in 1983 in Houston, paid a 250 dollar fine and 6 months probation. Low and behold in 1999 I’m charged again and found guilty by the Feds, stripped of Permanent Residency after 34 years in Texas and deported to Germany.

I believe that the Supreme Court’s decision in the case referred to (First Interstate) is one of the underlying factors in the current credit crisis. Unfortunately, the current versions of the House and Senate bills do not include provisions that fully reverse this decision.

In 1995, the Private Securities Litigation Reform Act (PSLRA) partially restored “aiding and abetting” liability–but only in the case of lawsuits brought by the Securities and Exchange Commission and only where the person who “aided and abetted” had “actual knowledge” of the violation. “Aiding and abetting liability” was not restored in cases brought by private litigants. Since the SEC is a “captive regulator” and synthetic CDOs are purportedly structured to be “exempt” from the registration provisions of the applicable federal securities laws (1933 Act, 1934 Act, and 1940 Act), the SEC can (and did and perhaps still does) look the other way.

In addition, “actual knowledge” is very hard to prove. As a result, the “actual knowledge” requirement creates “Don’t ask, don’t tell” relationships. Investment banks develop information silos, whereby the bank’s CDO group knows very little about what is going on in the bank’s mortgage origination group or RMBS group. In addition, investment banks do not tell their lawyers about any “inconvenient facts” that jeopardize the legal opinions necessary for a transaction to close, and lawyers do not ask their clients any “unpleasant questions” about the transaction or its participants that may endanger the lawyers’ ability to give the required legal opinions. Lawyers who have independent knowledge of “inconvenient facts” are “laid off” so that their knowledge is not “imputed” to other lawyers in the firm. As a result, the legal opinions for the transaction may very well be meaningless (but courts do not know that).

Before the First interstate case, lawyers and accountants could be said to act as “gatekeepers” to the financial markets. The deterrent to highly questionable transactions, such as Abacus 2007-1AC, was the threat of private lawsuits by plaintiffs’ firms (representing investors) against the lawyers who drafted the transaction documents and other transaction participants for “aiding and abetting” fraud. In this environment, transactions that “did not pass the smell test” did not “get done” and, in questionable transactions that marginally “passed the smell test,” conflicts of interest were fully disclosed.

After the First Interstate case, investment banks expect their lawyers to “muddy the waters” in the transaction documents and give legal opinions to the effect that the highly questionable transaction complies with applicable requirements of the federal securities laws. Lawyers who give legal opinions that are wrong are only very rarely held accountable for their actions. I would bet that the law firm that represented GS in Abacus 2007-AC1 gave a 10b-5 “negative assurances letter” to the effect that (to their knowledge) there were no material misrepresentations or omissions in the final Offering Circular. If so, I believe that GS will use this letter and the legal opinion for the transaction to raise an “advice of counsel” defense.

Unfortunately, in private markets, this is the way the game is played, but most people do not know this.

I don’t care what you say AFTER THE FACT and clearly after the SEC has been clear: J. Paulson is not named in the civil suit…I think J. Paulson should be nominated to the SEC and anything else said just runs the risk of sounding sour grapes!

I just re-read Zuckermans book and agree 100% with your analysis. We all agree that Madoff is a sociopath. I think Greenspan also qualifies! Did it not occur to the execs at Goldman why they made so much money in a negative market? Did it occur why they were paying young traders millions of dollars?

Why don’t we just close Wall street? it’s obscene and dangerous and only marginally useful. It’s supposed to help fund the economy but it’s seems that on the whole it eats more money from the economy than it feeds it.

Mike,
I understand you are saying don’t attach any bad signals to Paulson’s. Earlier we heard that Paulson’s selected the MBS for the deal because they were expected to fail and that 99% did fail within 12 months as expected. Paulson’s are stated to have contracted Goldman Sachs to create the derivative that Paulson’s could short for profit and how! Paulson’s paid Goldman Saches the fees of about 12 million dollars?

Now this, if correct, sounds like setting up a neat trap and only GS and Paulson’s were aware of the truth.

If this is correct I am not impressed with Paulson’s grip on ethics as they appear to be complicit in setting a trap! Please correct or confirm Paulson’s involvement if you believe I am describing Paulson’s in error.

Sorry but this article rankles of just plain ignorance, jealousy and lynch mob mentality. The author has not given the faintest iota of reason why whatever Paulson did was wrong. The basic premise is that as a hedge fund manager he took a risk against the mortgage market. All he needed was a small correction to reap huge gains (btw the real genius was a hedgie manager called Dr Mike Burry). Of course if ended up wrong he would have likely being blown up. No fraud involved there.

Clinton was basically just following the same line of business as Regan started. When it comes to financial law, I see Clinton as just another Republican in the long line that have paraded through the Whitehouse during my life. 30 of my 33 years have been lived in the Republican created and sustained debt bubble.

Clinton was doing what would keep him popular and get him lobbyist cash: act exactly like a Republican instead of a Democrat on financial laws.

Hey, I have this car I want my friend over here to sell you. I’m pretty sure brakes will go out and when you hit something the gas tank will explode, because the car is showing signs of those two exact problems. My friend’s not not going to tell you that, though. Nor is he going to tell you I was the one that told him it was cool to sell the car to you. Now I didn’t actually sell you the car, but I’m going to take a life insurance policy out on you because you’re driving a car I’m pretty sure is going to get you killed.

Is what I’m doing wrong? I mean you’ll be DEAD and I’ll be RICH, but technically I didn’t do a damn thing wrong, right?

We need to renew or rediscover the vocabulary of moral discourse. Our general speech is so bereft of a basic sense of right and wrong that it is hard to fault the Wall Streeters for being morally obtuse. As a citizenry we Americans have become morally vacuous, placing good times and success above goodness and rectitude. Our vocabulary reveals a lot about our attitude toward life and the obligations we regard as binding upon us. It is not possible to hold anyone to account for transgressing principles of right and wrong if we are unaccustomed to thinking and speaking in these terms.

Way I see it, 3-D upthread is spot on. Modern securities trading appears to be an inherently criminal enterprise run by thieves who think very well of themselves – and imagine everyone else should as well.

Actually Equityval, it is your argument that don’t pass the laugh test. Nothing personal, just assessing by your own standard.

You posted: “As it turned out, you could have throw darts at any mezzanine subprme RMBS (or CDO based thereon) of the 06 or 05 vintage and made a killing by owning the CDS on those issues. Paulson’s influence in shaping the list of reference securities in the deal in question might have made them fail a little faster, but the end result would have been the same with virtually any basket of subprime mezz debt from this era.”

This is a hoot. First of all the allegation of civil fraud is against GS, not Paulson. Second, if an entire class of assets is likely to decline, it’s okay to structure them so that the decline is, what was your word again, faster. As I read that I was expecting you to argue Paulson was merely “risk averse.” LMAO.

Oh PeterPeter yes by all means let’s reduce the acts to the pricing mechanism of the market. All hail the market.

Well and good except for GS misrepresentations that Paulson was long on the CDO and the sticky problem of failure to disclose Paulson selected the worst of the worst of the subprime mortgages available.

Ironic isn’t it PeterPeter, that those advocating caveat emptor post anonymously while those advocating fiduciary duty generally post under their own real names.

Equityval: I appreciate your position but there is alot of equivication and amelioration in the “sales” values you are trying to get us to accept at a time when damages are being assessed in the name of business. The mix of rhetoric (Lynching is a loaded term with a conclusion that goes beyond prejudice) is not the same as a public call for justice. This is not a bottom line scenario, it is an outright abuse of power in finance and a distortion of the public trust. Simon Johnson has been an authority figure in a situation where relativity is reduced to opinion. As an economist it is high time that at least one outspoken person from the discipline begin to call for accountability. If the excuse is that there are sharks in the water and everyone knows the score, than someone who walked away with other peoples money should be ready to face the tides of market retributions and that includes getting called to task as a professional. Ethical status has never been produced by equivicating circumstance. You are asking a practiced Economist (who may well be one of our leading Democratic representatives by popular proxy) to circumvent reality in favor of a potentially corrupt business model. Your metaphores are not accurate. We should be talking about how much the public sector will accept before they pull up wooden stakes and put it through the heart of this Vampire charade posing as “the way America does business.” Somewhere a call to justice will exceed the standards of an outright conviction. This confidence game hurt people and information (asymmetrical information) is not acceptable as a tool for hurting people. If the business model was destruction, than the Captain should go down with the ship.

Dark Ages? For whom? My thoughts tonight: Tim Geithner gave away millions of our money to these guys. Billions? Anyway, now that they have dispersed the money, they’re gonna be indicted? Get jail time maybe? All that money handed over to a bunch of criminals.

Oh come on! Simon Johnson makes some very good comments sometimes but also some bad comments at other times, and yours is not the type of praise we need heaped on anyone, if we want to find a solution. In fact, it is exactly that incestuous mutual admiration club type of praising that got us here in the first place. Like regulators commending each other for their splendid leadership in regulating.

And so, since I agree with “it is high time… begin to call for accountability” may I ask, again, where was Simon Johnson before becoming a Monday morning super financial quarterback?

1. Unrelated people originated the mortgages.
2. They were securitized by someone else.
3. The tranches in question were all investment grade rated by all ratings agencies.
4. Many “mez” CDOs were created using financial alchemy turning BBB suprime tranches into AAA CDOs.
5. 6-9 months after someone bought houses, Paulson realized none of this made sense.
6. Paulson bought CDS on the underlying RMBS.
7. Paulson bought CDS on mez CDOs.
8. Some mez CDOs were worse than others in the eyes of Paulson even though all of them were rated AAA by all the ratings agencies.
9. Paulson said, if it is all the same to the ratings agencies and investors (which it was), I’d rather own CDS against these investment grade rated securities rather than those.
10. Goldman arranged for this.
11. ACA selected which investment grade rated tranches of RMBS would go into its CDO, rejecting 60% of Paulson’s suggestions.
12. Paulson bought CDS on the ACA product.
13. It was well known that Paulson was short.
14. Most people thought he was crazy. He was the butt of tons of jokes for years.
15. He was one of a handful of people that was right.
16. Now Simon thinks he ought to go to jail.

It is possible that Goldman didn’t make all the disclosures it should have, but even that seems to be almost a diversion from the multitude of problems (the worst of which would be rating mez CDOs AAA which is what allowed Paulson to ever have this position in the first place).

The idea that Paulson could commit fraud by selecting among various investment grade rated tranches of RMBS to be re-securitized into a mez CDO is just absurd. Everyone thought he was an idiot.

I would like to hear from some knowledgeable person on why this fraud cannot be prosecuted under the RICO statutes. Forget the security laws; this was racketeering fraud conspiracy. Milken plead guilty under threat of RICO prosecution. Nothing would help clean up wall street like having people go to jail.

> Well and good except for GS misrepresentations that
> Paulson was long on the CDO and the sticky problem
> of failure to disclose Paulson selected the worst
> of the worst of the subprime mortgages available.

Suppose I believe that Paulson selecting a pool of potential MBSs for ACA to choose from was material information that GS should have disclosed (which I don’t believe…). Note that GS refutes that they told anyone Paulson (who at the time was literally a nobody – the market generally thought him to be the patsy back in 2007) was long. That would then put GS in a heap of trouble. Fine. I can follow that logic, even if I disagree with the premise that the disclosure of Paulson’s involvement would have changed anything in terms of the long investors decision to purchase the securities.

But ingore GS for the moment since I can entertain that there are readings of the law which they violated.

How does any of that make Paulson remotely guilty of anything? How does it allow Simon Johnson to label his transaction as fraudulent, and suggest that he broke the law and should be barred from continuing to work in the industry?

Simon says that Paulson is guilty of fraud because he made a lot of money from the transaction, and that (lack of) logic is utterly wrong, and should be quite offensive to anyone who transacts in any securities with the goal of making a trading profit (professionally or otherwise).

Paulson merely bought protection .. GS arranged to find the seller of that protection .. those sellers were not people like my mon /dad but savvy professionals who knew the risks but who misjudged the market .. If there was any misrepresentation involved, then GS would be solely responsible for that, and NOT Paulson .. Pls remember the same sellers had made billions of dollars in prior years taking on similar risk.

This board shows a lot of people thinking the justice system can fix the system, punish the cheaters (call ’em cheetahs), regulate away the fraud, and restore productivity and generativity to an America that has gone to seed, focusing on where we dwell and how we live, not what we accomplish.
I quote from Darmody at 9:25 on the 18th:
“We need our own Tea Party that propagates fact and truth about financial reform. This is the window of opportunity for positive change. Let’s not let it close without meaningful results.”
I looked at my copy of 13 Bankers last night and was amazed how well Simon Johnson has propagated that “gospel” over the years I’ve been hearing him, and without my ever reading a word. I don’t know if he says it, but I think the way the Common Person can make a difference would be to call in to Rush Limbaugh and “let him have it,” and wherever sound bites have reduced our mentality and morality, start to shake it up. Twist and shout. I dreamed one Republican unwilling to be herded (Massachusetts’ Scott Brown) would have a chance at doing that. That’s copping out. The media can’t do it alone. Politicians can’t do it alone. But people at large do matter, and economists trying to be abstruse and retain their claim to being incomprehensible are part of the problem.
Call your local call-in show with the irresponsible radical of the media. Keep at it; try to call them out. (Yes, I have a long time ago, at a friend’s request, and yes, it seemed — well, I am reminded of the story of the boy who saw a leak and put a finger in the dike, a young hero story of the boy who saved Holland.)
Don’t count on the SEC and the justice system to (a) achieve total overhaul and (b) shift public awareness of the situation.

“Finally, let’s think about who ACA was. For some reason, no one in the press has bothered to learn much about them. They can be thought of as a smaller version of AMBAC or MBIA. They provided insurance wraps on structured finance products as their main business, and had a side business as an investment manager of CDOs which was their role in the case in question. In other words, the core competence of the firm was evaluating credit risks in structured finance products. They were not some clueless school pension fund from Paducah – they were directly in the midst of the structured finance markets.”

So? They KNOW and they’re doing it anyway. Make a deal you KNOW is bad, keep dancing as long as the music is playing and cash out as much money for yourself, personally, as you can even if your looting activity is going to collapse your organization and the collective actions of all these individuals will collapse the entire financial sector–at which point your “business” becomes the business of the federal government.

At the end of the chain is conspiracy to defraud the government of the United States.

Per, I just found baseline after Moyers’ Journal on Friday, in grief at Moyers’ announcement he is withdrawing to an online presence, whatever that means. But I had heard of Baseline when Simon Johnson speaks to Charlie Rose, or when he is a guest on OnPoint. I’ll leave it at that. My memory may not hold every time I’ve heard him. The word “Peterson Institute” grabs me too, by the way. I don’t know if that is associated with old man Peterson who I always found resonated with my views, often counter to whatever current gospel was.

Joanie, I think the complex instruments were so complex that examiners/regulators were thwarted; unwinding it would ruin the whole spiderweb of deals, globally. So the question is how to get a commercial bank that is unwindable. “Smaller” doesn’t quite define the need.
But it’s possible that though the big banks couldn’t be unwound, altogether, in one weekend or two, that given several years of persistent lawyering, those banks will indeed fail, and in their own good time (or bad time), they will have to unwind themselves and reconstitute themselves in ways (one hopes) that conform to reasonable citizen expectations.
I think the real action in dismantling malfeasors is only beginning, and that to make it truly complicated, there are elections coming up, and the way the banks want the elections to go (with their lobbyists and campaign financing) will surely be a big vector in the way the SEC of DoJ or state judiciaries do play their cards.

Absolutely but for a start the regulators should not have prescribed the big the growth-hormones they needed to become too-big-to-fail… and the best alternative now might simply be to suspend such treatment.

I think there’s a good old goy system back there. I think Killinger was not a member. He was as criminal as the rest of them but he wasn’t a member.

Geithner knew what had happened. Summers was probably aware of it. (Sommers?) I’m not naive. They’ve all been around the block. As Clinton admitted, he shouldn’t have trusted them. Did you hear Levin’s panel interrogating Killinger and Rotelle? These guys are criminals. Obama’s own finance guys were part of the club before joining the administration. Geithner handed over how much money without strings or commitments. He trusted. Come on. He was one of them before and he’s still one of them. Maybe a little embarrassed now. If that’s possible with these guys.

A few years in club fed and back to enjoying their riches. That’s how it works.

After Katrina, betting on gov.incomp. was a sure thing. Was the packing of the Justice Department just a compliment to the new S.C.O.T.U.S. boys, and dotting the i on the Rovian Doctrine so that when we got sucker’d? well, “It is what it is.” (a cliche on Wall Street).

You might check out David Degraw “amped status” blog and The Economic Elite vs The United States of America. I haven’t read it but have heard him interviewed. Quite a story! There’s a lot more to Goldman than meets the eye if one can believe Degraw. And Hank Paulson is a big part of the story as well.

Wall Street is a whore for the Central Bank…their “Big Daddy Pimp”,period! The Federal Reserve controls all three branches of government,and has for the last century. How dare I make this rash comment that some or all might say,…nay? Given this countries sordid financial history,and how the British,and other foreign entities are the puppeteers regarding America’s future predictably,and wholeheartedly since the “Federal Reserve Banking Act”! Yes,…this law was created,and passed by President Wilson on Dec.23,1913 with little fanfare? Listen up,say the foreign obligarch in their Temple-on-High! How dare these americans print,and mint their own money,and not pay interest on it – this was the war cry from these parasites,…! Note: War Cry,…follow-up, paste,and copy the chronological timeline of depressions,and useless wars we had to get involved in? Does anyone realize that Lehman Brothers was quickly bought up by the British through bankruptcy courts for approx.$12.5bn…when six months prior too its demise was valued at “Two-Thirds of a Trillion Dollars”,…wow! They are sucking our country dry, whereas we are on the precipice of ruin. This is what happens when we have no transparency regarding the “Central Bank,…for all we know the Stalin Family,and Mao Family could be members calling the “Shots”? Finally back to the subject of GS’s,and Mr.Paulson regarding “Synthetic CDO’s” (ie. gambling chips from your local casino)…remember the house (GS’s) always wins,and they were well aware of the assets being played,… the “Racers”(Restructured Asset Certificates with Enhanced Returns) but were “the untouchables – pure kryptonite” and only a fool would be greedy enough to trade them rather than write down the loss? Thanks ….and “Keep on Digging for America’s Sake”

Re: @ JerryJ……They were all rated “AAA” by Moddy’s,Fitch,and S&P’s the co-conspirators layered in the vulpines den of inequity. PS. Has anyone ever notice the “Three’s” in rating agencies ie.)TransUnion,Equifax,and Experion (the common folks make or break leeches)

“‘”When profits fall too sharply then capital will move somewhere else, where there is more money to be earned, for example non-regulated markets,” Chief Executive Jamie Dimon said in the German mass circulation Sunday paper Welt am Sonntag. “The question is, is that what regulators want?”… ”

I don’t know, Jamie. It sort of sounds to me that governments abroad might be eager to ban the ugly Americans from markets for life–probably for a whole assortment of reasons.

A number of commentators in this stream have made the point that the people (or organizations) who brought about our current economic woes did nothing wrong, under current laws, rules, or regulations.

Doesn’t that tell you something? We have an economic/finance system that not only allows, but actually rewards activities that tend to weaken or destroy the system itself. Systems that do not institute rules against their own self-destruction do the obvious thing — they self-destruct. I would again point to Jared Diamond’s “Collapse”, as required reading for those who need to learn about how systems work and fail to work.

George Santayana said that those who fail to remember the past will be condemned to repeat it. Jared Diamond might be paraphrased to say that those who don’t understand the system they are caught in may have trouble surviving.

I have yet to see anyone argue against Simon and James sensible solution: break the super-huge financial entities into smaller parts.

Paulson found a box of anthrax on the side of the road. He packaged the anthrax in a pretty box and took it to Goldman Sachs and asked them to sell his pretty box to their customers, who were comfortable with and quite used to receiving pretty boxes from GS.

But before they mailed the pretty boxes off, both Paulson and Goldman took out insurance policies on all the people they were mailing the pretty boxes to (along with everyone in their household with access to the mailbox), just in case those people actually OPENED the box. Which they did. And when those people died (it was anthrax, don’t ya know), as Paulson and GS knew they would, Paulson and GS collected the insurance money.

I think the point is that there was tremendous demand for cars of exactly this type. Paulson didn’t manufacture the demand, he tried to sell into it because he saw the bubble. He was pretty vocal about the fact that he thought these cars were overpriced.

I write this comment with heavy disappointment. I typically find your writings to be highly insightful and supported by facts and careful weighing of multiple positions. This post seems shockingly out of character, I almost question if you actually wrote the post. This argument has been amazingly distorted and sidetracked in the comment section. I will simply say I generally agree with Equityval’s position. I eagerly await your return to form.

It could be because Simon Johnson does not understand sufficiently about this issue and therefore has no idea that IKB, the hurt German investor’s final and only decision purchase, had absolutely nothing to do with Goldman Sachs, Paulson or ACA for that matter. http://bit.ly/acaRfo

It get’s even more interesting applying the observations of Joseph Tainter in his ” The Collapse of Complex Societies”. The US as a society is rife with collapse oriented irreconcilable differences. Our system is based on the legal precept that “you may until the law duly says you may not”. Our jurisprudence and self governance would not work under the opposite precept ” you may not until the state duly says you may”. Do we apply the you may not until duly authorized concept to finance? If we did, we would loose all kinds of defiance and criminality. So we really do come back to a society collapsing from inability to agree about basic concepts. The problem given complexity arising from technology may well be that complexity itself requires that you may not until the state duly says you may. Every society operates under precepts peculiar to it’s organizing original principles.

For example, survival may well preclude expressions and acts about beliefs in ” end times”. That would not be enforceable by the state for the simple reason that the energy and social capital required to eradicate the superstition would be too much for the society to absorb in it’s present state. So,do we break up into an ” end times” state and other idea based states?

There is a lot more riding on financial reform than readily meets the eye.

While I don’t have too much sympathy for John Paulson, he is not the villain of the piece. He was very clear for a long time that he thought the mortgage market was toxic, and said as much to anyone who would listen. For a long time, all the “experts” on Wall Street thought he was crazy.
No, we need to stay focussed on Goldman Sachs. Their sticky fingers are all over the center of this web. Not only were they playing both sides, but they even got Uncle Sam to pay them 100 cents on the dollar for all their exposure vis AIG – thanks to their ex-CEO Hank Paulson. If you want to go for a Paulson, that’s the right one to go for!

“This CDO was an insurance contract, a bet, placed by a party (Paulson) lacking any legitimate insurable interest.”

I assume you mean that Paulson’s CDS from Goldman, and, thus indirectly, Goldman’s CDS from ACA was such an insurance contract. Such contracts should be illegal and probably would be if CFMA2K hadn’t preempted state insurance, gambling, and bucket shop laws. Still, in some states, the proceeds of such a contract are deemed held in constructive trust under principles of equity for the benefit of the owners of the insured property. Plaintiff’s lawyers may have been scared off until now by CFMA preemption, but fraud claims are not preempted, and I would think that a pretty good case could be made that the equity principles that apply to insurance contracts are not preempted either.

As for the paper burden, the plaintiff does not have to prove lack of disclosure. He just has to allege it and testify to it. The jury can infer it from the lack of rebuttal evidence from the defendant.

I disagree that IKB needed to be more diligent. They hired a gilt-edged investment banker, demanded that the banker use an independent selector for the pool, and got AAA-rated paper. They had a belt, suspenders, and overalls on top to protect them from being caught with their pants down. If foreign investors cannot rely on our banks, mortgage specialists, and ratings agencies, no one will invest dollars anywhere but in the Treasury.

But IKB did not “sign on as an insurer.” Are you referring to ACA? They did do their own review, but insurance underwriting is a subjective process, and the risk of adverse selection needs to be accounted for. If it were known that Paulson intended to short the pool, ACA Management would have had nothing to do with him as co-selector and ACA Holdings would have refused to refuse to issue the CDS if he did. ACA’s mistake was in not requiring that Paulson in fact have skin in the game, i.e., that insurable interest.

Another comment. While not foolproof, the British have a concept called “Spirit of the Law”. This catch-all allows them to prosecute even when something perpetrated was strictly speaking within the letter of the law. Given how fast the modern world changes, American jurisprudence should embrace this concept. As we all know, getting new laws/regulations through Congress takes forever and a day, and eventually gets so diluted as to be virtually toothless by the end. A “Spirit of the Law” clause would make it more difficult and dangerous for “wide-boys” to deliberately circumvent the rules.

You’re right. It’s a totally great idea for only ‘insiders’ to know what’s really going on with “how markets function”… or to be the only ones allowed to talk about it. I’m sure they have our best interests at heart.

Simon Johnson has gone from TBTF to Too Big To Take To Court, which is really scary. 3 Banks, 43% GDP, overwhelming lobbying, money seemingly without limit, friends in DC, both parties, revolving door, stretching from DC to WS. Another Mafia?

Ignore Per Kurowski…. he falls quite clearly into the camp of people that think THEY have the key to the problem (ratings systems I believe is what he claims) when the failure was systemic. And just so you know Per, we get it, you’re amazing.

Also, when we broke up monopolies previously in American history (without wasting time trying to figure out how to eliminate their intake of growth hormones) it healed the problem after a brief period of pain.

Unfortunately what GS and Paulson was doing doesn’t seem very rare or illegal to me. Or if it is illegal is the SEC really going to file lawsuits on everyone who shorted a CDO? That seems like the wrong approach to a problem that wasn’t about Goldman or CDOs or CDS’, but a whole systemic problem, enabled by banks that were too big to fail.

… so the argument is “if there’s a whole bunch of people all doing it, then it’s fine for me to do it too!”

Well hell, the cigarette companies should start taking out life insurance policies that cover lung cancer on every person they sell cigarettes to immediately! What a great business model. Think I’ll start manufacturing cigarettes and buying insurance. It’ll be ok though, because everyone will be doing it in a couple years. Thanks for the tip! NOW I truly understand modern American morality: ANYTHING is OK, so long as YOU make a buck off it!

“Oh, that bad, bad short seller, John Paulson! He had the gall to think that the hot air balloons that were the CDOs could go down as well as up! Drawing and quartering’s too good for him! Boil him in oil, castrate him, tar and feather him, then draw and quarter him! The nerve, the absolute chutzpah!”

John Paulson went up and down Wall Street telling everybody the CDOs were overvalued and were going to fall. They all laughed at him. He had to beg and plead investors to join his fund. And you want to blame him for being right when everyone else was wrong? I guess it’s true, there’s nothing worse than somebody who says, “I told you so.”

He went to Goldman Sachs and said, “Put together the worst dreck you can find, I’ll even pick it out for you, so I can bet against it.” And they did. Is that his fault?

Let me explain to you why Paulson didn’t do anything wrong, in the words of one of America’s foremost financiers, Sky Masterson. Nathan Detroit has just offered to bet Sky a grand that Lindy’s Restaurant sells more strudel than cheesecake, even though “everybody knows” Lindy’s sells more cheesecake. Of course, Nathan has already found out that Lindy’s sells more strudel. Sky answers:

“On the day I left home to make my way in the world, my daddy took me to one side. ‘Son,’ my daddy says to me, ‘I am sorry I am not able to bankroll you to a large start, but not having the necessary lettuce to get you rolling, instead, I’m going to stake you to some very valuable advice. One of these days, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, you do not accept this bet, because, as sure as you stand there, you’re going to wind up with an ear full of cider.”’ credit: Jo Swerling and Abe Burroughs, Guys and Dolls.)

It is NOT the fault of John Paulson that Goldman Sacks was cocksure and greedy enough to take his bet.

Re: @ Richard Saunders….please show me in writing where Paulson went up,and down Wall Street preaching,and saying the sky is falling regarding the “Big Bad Wolf peddling them tainted CDO’s! Only Satan has that foresight,and capability,…huh? C’mon,….man,if it quakes like a duck,its a duck,period!

Thanks Mike, very helpful. I hold no brief for the damaged parties. I think the following seems a little shaky or at least thin.
——————————————————
10. Goldman arranged for this.

This seems a little superficial. Actually this act included planning the drop-dead derivative with Paulson, putting ACA into the play as interference, Not revealing roles, not acting in best interests of GS clients. ‘Arranged’ covers a lot of ground Mike.
—————————————————
11. ACA selected which investment grade rated tranches of RMBS would go into its CDO, rejecting 60% of Paulson’s suggestions.

The short seller selected the content (even if it went through a second ACA filter)? Was Paulson’s role clear to all?
———————————————-
12. Paulson bought CDS on the ACA product.

You omit any acknowledgement of Paulson involvement in product creation. Was this concealed from some parties? If it was not significant why did Paulson get involved in the selection if not for material benefit to Paulson? Did this material advantage result in the $1billion benefit or was Paulson just lucky?
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13. It was well known that Paulson was short.

Well known? Are you saying that Goldman Sachs clients were privy to Paulson involvement in selection of the securities which went to ACA for approval? It appears to be a question whether Paulson and GS concealed aspects of the deal? Was this to benefit GS and Paulson and have GS clients wear the loss?

No! It had nothing to do with a “Satan’s foresight”. The ABACUS 2007-AC1 was subscribed on April 26, 2007 and before that date I had in my blog TeawithFT I already sent letters related to 4 articles published by the Financial Times on the subprime mortgages.

Legally, a CDS is not insurance; CFMA2K says so. But it has practical consequences similar to insurance and so should be subject to the same sort of analysis as insurance where those similarities come into play.

Insurance contracts unsupported by an insurable interest are illegal in every state because they are a bad thing. Not to put too fine a point on it, such contracts conduce to mischief. Whatever there is about such contracts that has led every state in the union to outlaw them is also true of a CDS issued to someone not holding the risk insured. Such CDS’s should be illegal, too. The morons who passed CFMA2K just plain blew it.

CFMA preemption notwithstanding, I don’t see why a state court could not rule that, to prevent mischief, the proceeds of a CDS paid to someone who had no interest in the covered debt should are deemed to be held in constructive trust for those who did hold the debt. Such a ruling would be analogous to how insurance contracts without insurable interest are handled in some states. But, because a CDS is not “insurance,” a ruling about a CDS on the basis of public policy wouldn’t be part of the state’s “insurance law” either. At least, I’d like to see a plaintiff try to make that case.

The phrase “spirit of the law” is frequently used in the United States, but it cannot be read to criminalize otherwise legal behavior.

If your reading of English law is correct: without going into the details of why it would overturn over 200 years of American criminal jurisprudence (hint: look up “presumption of innocence;” “void for vagueness;” “separation of powers” and “bill of attainder.”) my comment would be “scariest. concept. ever.”

However much I would like to see some financial criminals in prison, I like the idea of a criminal law where the lawmaking authority is delegated to judges and prosecutors, where acts can be retroactively criminalized on the grounds that those acts do not pass a “smell test” far less.

You have said you “amend the 1994 Riegle-Neale Interstate Banking and Branching Efficiency Act, which said no bank can have more than 10 percent of retail deposits in the United States”

Say we break all the big boxes into little S&L again -this may limit wholesale exchanges but does not rebuild the US economy.

You propose here to have an Act of Congress give the public the body they want to see strung up.
Of course Goldman is a Market Maker.
When /or if /the whole story is opened then we might map out an new “act of congress”

Re: @ Per Kurowski….. Legal Factoids: “Synthetic CDO’s” are illegal,period! They are naked Shorts of the third kind? Dirivatives built on dirivatives are a unequivocal atypical Classic Ponsi Scheme. They are CDO’s to the Nth Power, built only on finite collatoral,…with unlimited,and catastrophic risk!

As usual Money is the root of the problem . The sub prime mortgages and the Liar mortgages were designed to reach the greed in people who took the bait. Their upward adjustment typically from 7% to 12% in two years was a sure over-Niagara for them . As the droves of now-it-can-be-told literature shows it did not take an astrophysicist to see the issue of the faulty swaps and CDO’s that resulted with the eventual bloodletting. Thus a trail of perps and victims at many levels resulted with losesand a few keen analysts made a bundle. Unfortunately there were more small losers than the few victors.
What does fairness (the American way) say should happen……the usual, viz. the innocent taxpayers make as many as possible victims nearly whole ,the rest go on welfare and the perps go to East Hampton for the Summer with a new East Side COOP to return to in the Fall.The Feds then sue the devil from some prominent perp and ten tears later after both spend a bundle settle….. mostly by their estates.Their legatees can now go to an Ivy Business school or law school and start the process all over.

What should Congress do?….flail around and put a blow out patch on the system so the next time this occurs and something similar is sure to occur we taxpayers will not be hit but perps shareholders and bond holders will go home in the proverbial barrel!

No they should not be illegal! What should be illegal though is that the regulators allowed the banks to invest in these derivatives with only 1.6 percent of capital as long as these were rated AAA or slightly less.

In November 1999 I published an article that said:

The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or the financial dinosaur that survives at that moment.

Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

What we are living is the Big Bang I spoke about… and for which I am so unpopular! http://bit.ly/cPhzRF

Your missing the point. He could just as easily have been wrong and then he would have lost billions! Would you then say that the government owed him because he bet wrong? Of course not, you only want the win never the chance of a loss. The government caused the problem and then you complain when someone capitalizes on that problem. If your going to criminalize that logic then please start putting the Clintons in jail, and the obama team.

Bravo to your post. Clear thinking not the hypocrisy of the populism has me agreeing with on a number fo points. Also….

Simon,
As a former student of yours and former admirer, I could not disagree more with your notion that Paulson is guilty of anything other than having an opinion and expressing it financially. There was no secret about the future fortunes of housing in 2006 or 2007 or 2008. I found by googling, a whopping 19.4mm cites for that period expressing skepticism over the housing market. The surprise was so many including Goldman Sach didn’t hear it, see it, or sense it. The mere fact that Mr. Paulson found a number of vehicles to short it, should be applauded. Most of the people who bet the other way were not only wrong but absolute dunderheads.
On any given day an investment bank creates securities for their clients to express an opinion in the market for money. It is surprising you don’t see that. Your supposed high road on this issue is undermined by the facts regarding Mr. Paulson. Your ire for Goldman’s disclosure is all that is left and there they may have a problem or perhaps not. The facts are not out there yet. I am no fan of Goldman Sachs, but this was the best the government could come up with? Please. Oh and lets talk about timing of the case…hmmm. It seems Mr. Alinsky is now alive and well at the SEC, Treasury and the Whitehouse.

Gotta love the Anthrax view. Of course, with hindsight you are brilliant, with foresight you may or may not be. This happened in the midst of the dumbest retail trade ever—buying a house at a pay to price ratio never seen before in the US. Please tell me who signed on the dotted line on the mortgage? Oh for those of you who said you couldnt understand, I have one answer learn to read and don’t sign things you dont understand. Where are the prosecutions of the fraudsters who bought houses on liar loans?

Ridiculous to implicate Paul Johnson on this CDO transaction. He had his input folks going long knew that someone is shorting it. What the CDO is made up was fully disclosed. If the folks going long were lazy or stupid it is their loss.

The main culprits are the rating agency and banks for insuring these. If they did not understand this then they should have stayed far away from it.

In the end Goldman and Paul Johnson will be vindicated. Simon will sell a lot of books by spewing nonsense to folks who looking for scapegoat. Nothing can be better than flogging Goldman and Paul Johnson in public.

Greenspan could have been the one person to correct all of this. His ideas of reducing the Fed rate was so stupid that no one could or wanted to see it. No one in Fed history kept the fed rate as low as he did from 2001 to 2004. At one time he had it at 1% for a full year June03 to June 04

That’s a load. He bet hard because he built the product KNOWING it would fail. Look at the behavior of everyone involved: the money wasn’t in getting customers a product that would make them money. The money was in getting the customers to buy a product that wasn’t worth a damn, then reaping the profits on it failing. Look at how they bet. They KNEW what was going to happen.

If he was betting everything on what the weather (created ENTIRELY outside of his power to manipulate or choose anything) would be tomorrow, using the same information everyone had, then yes he “could just as easily have been wrong”. But when you’re betting on if a car you put on the market with defects (accidental or possibly even engineered) only YOU knew about will get its occupants killed? You’re no longer playing the odds. You’re RIGGING THE GAME, and you deserve to lose everything.

Anyone that finds you rigging the game and doesn’t severely punish you for it is lacking an understanding of how a free market is SUPPOSED to work.

you are viewing the world through the eyes of a “politico”, and a silly extremist one at that.

These wheels were set in motion by the estalishment of Fannie and Freddie (which were supposed to allow for lower interest rates by “spreading” risk across many packaged securuties, similar to an insurance pool). The Community re-investment Act, ACORN and friends, many other entities pushed for lower rates that were riskier for many borrowers than a pure economic risk analysis would allow. Repealing Glass Stegal by Clinton, de-regulation by Clinton, and further actions by Bush all chipped away. The biggest faliure was by the ratings agencies who placed AAA ratings on things they didn’t understand.

All the models placed a very low probability on housing ever declining significantly, but we happened to hit that Black Swan which can be attributed to the 40 years of actions preceedingit, plus the huge investment money coming from asai by the eraly 2000’s.

BTW – “Predatory Lending” is pure left-wing extremist BS. Did you ever watch the TV show “flip that house”? 99% knew exactly what they were doing, they gambled and lost.

I still have not seen any explanation on two key points here. Both matter because even the most extreme critics of the ABACUS deal must surely admit that it was ACA who produced the final list of bonds
1 Why does Paulson’s motivation matter at all? Accept for the moment that he wanted bonds that would go bad in the CDO. Butt if he had wanted bonds that would do well, ACA had no reason to trust his judgment. He might have been bullish and wrong about which bonds to include. When they took a fee ACA assumed the obligation to do their own homework. It’s on their decision taking that the value of the CDO stood or fell.
2 How can anyone say that ACA was duped into believing that the bonds had been selected by ACA? ACA was the biggest investor. The ABN wrapper was an insurance policy for Goldman in case ACA went bust. It did not in any way protect ACA from losses on the CDO.
It’s obvious that they did a really bad job and no one should shed tears for them going under.
This is going to be one of those cases where the underlying scandal of the behavior of banks get lost because people choose the wrong case.

1. Insurance underwriting is a subjective process, and the risk of adverse selection needs to be accounted for. To an insurance underwriter, a bearish Paulson would cause the portfolio to be more risky than a bullish Paulson. I would be surprised if ACA would have insured such a portfolio, but if they did, they would have upped the price to account for the selection process. Also, in this particular situation, ACA Management was being paid by IKB to pick a good pool, so if ACA knew that Paulson intended to short the pool, they would have had nothing to do with him as co-selector, and the CDS issue would never have arisen.

2. Whether ACA deserves sympathy is irrelevant. There’s no crying in baseball, but cheaters are punished for the good of the game.

Sorry,…while proof reading – Blackrock Inc. revenue’s was to read, “assets under management”. Important: The future “Dirivative Clearing House Market” (transparency is the word of the new day,just ask Obama?)?)under legislation will become a new division (product/marketing/vehicle-tool) division of BlackRock Inc.? The United States Treasury& Federal Reserve are currently working on a program too transfer $1.3tn of mortgages off its books,…having these securities repriced,and moved into the open market. Guess who’s going to get the lions share of business,…?

Re: @ Rhichard Saunders____Here we are four days into the disposal of poor John Paulson via Goldman Sachs, and just released timely E:Mails by congress,thus illuminating the uncharacteristically wassailing of GS’s finest rainmakers – “The Exotic Twist of Seedless Clouds” have befallen the chosen? Research is such a valuable tool if,and only if its timely – for the Time-Travelers forsakened journey is not meant too be devoured by a “Den of Thieves”.

I love your optimism…it is going to be very interesting to see the goldman-sacs outcome. They were the forefront of the avalance that is yet to come… they started the hedging while knowing the industry was gong to crash….they betrayed not only their customers but america. The house of cards that you speak of is slowly starting to crumble and it is going to be very scarey when it is finally exposed…the mortgage meltdown will leave long lasting devastation behind for years to come. If they shut them down, i am sure they have another plan for another day in a little different way. I am praying for more exposure on the mortgage fraud crisis. Thank you for your imput, it is appreciated. Debi J

I’m sorry but this is nonsense. ACA’s obligation was to examine bonds for inclusion in a portfolio. It is clear that they did not believe the bonds selected were bad, because they allowed another part of ACA to be a major investor.
ACA accepted some of Paulson’s suggestiopns, rejected others and add more of its own. Yet the ones it initiated went bad just as surely as the ones on the Paulson list. So how can Paulson’s role be relevant?
Even if it were, that is a question for Goldman Sachs not him. He wanted to short mortgages and had views based on research as to which ones would do particularly badly. It’s because too many other players took money for NOT doing research like that that we had the crisis. More Paulson’s sooner would have made him less rich but the rest of us much better off.

I absolutely agree, Paulson should never have been given the ABACUS 2007-AC1 chance.

This operation is dated 2007. On October 19, 2004, a written statement I gave at the Board as an Executive Director of the World Bank included the following:

“We [I] believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And I was no investment banker nor a regulator nor an investor, and so to me it is clear that all of them, had they done their job, should have known… and that the crisis should have been nipped in the bud much earlier as the real explosion in truly bad mortgages took off in June 2004, when G10 approved Basel II.

I have written and said much before during and after my term as an ED of WB about what was doomed to happen and so have many others though today, all those who kept mum when they should have spoken out, (which includes Simon Johnson) are quite effectively circling their wagons.

An insurance company knows that there are things it does not know about a risk. It prices that risk into its premiums. A key risk is adverse selection, the tendency of people seeking insurance to need it than the average person running the same sort of risk. Maybe the insurance-seeker knows something about the risk that the underwriter doesn’t know. That possibility poses a risk to the underwriter and has a price. ACA was, allegedly, denied the opportunity to price that risk appropriately, thinking as it did (again, allegedly) that JP was buying the equity tranche of the CDO and so did not have any reason to shade the portfolio to the dark side. That’s how insurers work, and that’s why it is fraud to misrepresent one’s relationship to the risk insured.

That almost all of the loans failed is irrelevant to JP’s legal position. If I buy life insurance and lie about whether I have cancer, and then I get hit by a car, the insurance company can still walk away from the contract, even though the car would have hit me anyway, because the company would have denied the application if it had not been lied to, and lying cannot be excused by luck. (Maybe terminal cancer patients are more likely to die from other causes because their interest in staying alive is statistically less – maybe avoiding the pain is a psychological motivation, etc., for risk-taking. The liar doesn’t get to say that his lie didn’t matter.)

As for people not doing their due diligence, ACA certainly was asleep at the switch. JP’s rejection of the Wells Fargo laons should have set off all sorts of alarm bells. But fraud is still fraud, and IKB is not to blame for ACA being fooled by Paulson/GS, if that’s what happened. So IKB’s claim against JP as a co-conspirator in a fraud on IKB is unaffected by ACA’s blunders or the collapse of the market generally. (If JP?GS had come clean about JP’s role, maybe GS cannot put together a deal and IKB doesn’t get burned. That there would have been a deal and IKB would have lost its money no matter what are speculations that the plaintiff in a fraud case shouldn’t have to disprove.)

I don’t think you were swinging at my ball since I agree with most… except that I know that, at the end of the day, the real guilty party in it all were the credit rating agencies, because had they not rated this as good securities no one would have even touched them with a ten-foot pole.